In the pre-Covid days when former chancellors could make a decent income on the after-dinner and conference circuit, Norman Lamont would tell a good story about his first day in office.
It was November 1990. With inflation at its highest level in 20 years, he was greeted in the hallway of Number 11 Downing Street by the Secretary to the Treasury, who said: “You will soon be the most unpopular man in the country.” Lamont’s rueful punchline? “In all my years as chancellor, that was the only forecast the Treasury got right.”
Economic forecasting is not a reliable skill. This is a shame, because an ability to predict the ebb and flow of macroeconomic forces would be handy for most investors.
As a result, sensible investors make little attempt to time markets. They instead ensure their portfolios are well diversified. However, there is one area of data science that is worth examining if you are looking to identify long-term trends: demographics.
Birth rate data is pretty reliable, making it easy to see the size of different population cohorts and follow them through the ageing cycle. They go in waves.
In the UK there are 14m baby-boomers today (there were 15m at the turn of the century, making this the biggest cohort). They are now retired or heading that way. Their spending is likely to fall, and their healthcare needs will rise, putting a strain on the NHS as this particular bulge in the population works its way through the system.
Investors can adopt a thematic approach that aims to capture these tailwinds. One that has proven successful for our investments in recent years is “healthcare costs”. We are not investing in all healthcare businesses but trying to find those that help improve public health while keeping costs manageable. After the past couple of years, we see diagnostics companies such as Thermo Fisher and PerkinElmer as key to early diagnosis and trying to keep us all out of hospital.
So far, relatively straightforward. But in an excellent new book, Bobby Duffy, professor of public policy at King’s College London, asks: “Does when you’re born shape who you are?” Generations explores how the experiences of each cohort and the age in which they are born can influence their character and behaviour.
The book explodes some stereotypical intergenerational myths, and it could help investors in their thinking. For example, in their late 20s only 20 per cent of those in Generation X lived in their parents’ home, but by 2014 31 per cent of millennials were doing so.
This shift has been significantly affected by the affordability of housing but also by the sharp increase in attendance at university — around 28 per cent of those in Generation X experienced tertiary education, compared with close to 50 per cent of millennials. This is a factor in millennials being later to buy a first house (and get married and start families). But it should mean they are better educated and more productive in their work.
It should also give us confidence to invest generally. One of the disappointments for economists in the immediate wake of the global financial crisis was that millennials — then in their 20s — were not getting a foot on the housing ladder.
The act of mortgage borrowing and setting up home is a ferocious driver of the economy, but if that is happening 10 years later then it means the large and well-educated millennial population is now coming into its most productive and higher-earning years — and spending heavily. It bodes well for economic recovery.
This extends beyond just housebuilders and soft furnishings. It is a factor in us holding Tapestry, which owns US luxury design house Coach. As the brand targets 20- to 40-year-olds, it might have a happy period coming up compared with the traditional luxury bag makers. Louis Vuitton trades on 33 times earnings with a 1 per cent yield — we own lots of this but would not argue it is a bargain — while Tapestry trades on 11 times earnings and yields 2.6 per cent.
When it comes to wages, though, there is a genuine difference between the generations. In the US, when they were in their late 40s, the boomers (now aged 56 to 76) had 5 per cent higher real incomes than those in Generation X do today. In Italy, the gap between these cohorts is 11 per cent.
Similarly, in the US, in their early 30s, those in Generation X earned 5 per cent more than millennials reaching that stage today. In Italy the gap is 17 per cent. So real pay at the same time in life has been falling for some decades — and very sharply in some countries.
Those gaps in real incomes between cohorts are unlikely to widen forever. The current economic recovery and labour shortages seem to be encouraging employers to lift wages for the underpaid — from petrol tank drivers to chefs and fruit pickers to care home assistants. And rightly so.
How far recent trends will go towards reducing pay gaps is unclear, but it does not encourage me to own shares in companies in the restaurant and hotel trades that rely on large numbers of younger people and will struggle to pass on the costs of pay rises.
Similarly, we have reviewed our holdings for their exposure to increases in energy costs. The necessary period of adjustment for labour and fuel cost increases could be painful for some industries.
Readers would be right to point out that this sort of analysis is high level, talks in averages and misses a plethora of human stories. I certainly would not base investment decisions solely on demographic data and interpretations of it, but it can be a useful factor.
Simon Edelsten is co-manager of the Mid Wynd International Investment Trust and the Artemis Global Select Fund