How to prosper from an ageing Australia
Demographic tailwinds support companies exposed to growing, older population.
“Just remember, once you’re over the hill, you begin to pick up speed.” — Charles Schulz.
Australia’s miraculous run of 25 consecutive years without a recession stands on many legs. Cheaper credit, a commodities boom and the rise of dual-income households played their parts, as did falling corporate and individual tax rates. And a splash of luck.
But there was another driving force behind Australia’s epic run of growth: booming population growth, at least by developed-market standards. Australia’s population has grown at 1.3 per cent annualised over the past 25 years, well ahead of the US (1 per cent) and the UK (0.5 per cent).
Immigration has been the tailwind separating Australia from the developed world – a net gain of one immigrant every two minutes and 36 seconds, according to the Australian Bureau of Statistics. But the key factor in population growth has been increasing life expectancy. An Australian woman born today can expect to live 4.1 years longer than one born in 1991, and men are extending their lives at an even faster rate, by 5.9 years over the same period.
An ageing population has practical financial consequences at the macro and micro level, and investors would do well to position themselves ahead of the curve.
Australians are getting older, much older. Not Japan-level older, where the median age is now 46.1 years. The Australian median is about 37.5 years, or about 5.4 years older than when Australia last had a recession.
Sources: United Nations, Department of Economic and Social Affairs, Population Division (2015). World Population Prospects: The 2015 Revision, custom data acquired via website.
The glass-half-empty issue with an ageing population is the shrinking proportion of the workforce relative to retirees. The percentage of the population aged 65-plus, which was only 11.1 per cent in 1990, is estimated to rise to 20.3 per cent by 2035. Meanwhile, the working-age population, which is defined as ages 15 to 64, looks to have peaked in 2010 at 67.3 per cent and is estimated to shrink to 61.9 per cent by 2035.
Another way to frame this mounting imbalance is to compare the working-age population to retirees. If current forecasts hold up, the proportion of working-age adults to retirement-age adults is expected to shrink by almost one third over the next two decades.
Sources: United Nations, Department of Economic and Social Affairs, Population Division (2015). World Population Prospects: The 2015 Revision, custom data acquired via website. Calculations by author.
You can slice and dice the data any number of ways, but it all points in the same direction: a smaller share of working Australians pressing up against rising demand for entitlements.
Opportunities and challenges
Australia’s ageing will have profound effects on fiscal and monetary policy.
Fiscally, the country is already running large budget deficits and cruising towards a credit downgrade, which means that growing workforce imbalances will only make the eventual medicine taste that much more bitter. I expect the medicine will come in the form of higher taxes on high earners, as that is the most politically expedient way to solve budgetary problems.
Investors and high earners who are not positioning their affairs for such a potential outcome might rue not doing so.
Monetarily, the Reserve Bank of Australia, which is already contending with stagnant wages and stretched household balance sheets, will feel pressured to offset these existing and mounting fiscal headwinds with continued ultra-low interest rates. Low rates for longer is bad news for those banking on fixed-income products but also helps to support financial asset values at large, especially the likes of dividend payers.
Then there is industry, where changing demographics mean changing needs and tastes. The most conventional play on the theme of an older Australia is an outsized allocation to healthcare, with a straightforward logic that a rising base of seniors will mean greater demand for medicine, medical services, equipment and aged care, among other things.
However, although I do think rising demand for such services is evident, if not even too evident, I am far less confident on the economics. Many healthcare business models are reliant on the government providing financial support to customers, meaning the stroke of a bureaucrat's pen can upend some business models.
This lesson in the difference between underlying demand and a strong investment case most recently became painfully clear to investors in aged-care operators, and it will not be the last such example here or abroad.
Two standouts in financial services
(Editor's note: Do not read the following ideas as stock recommendations. Do further research of your own or talk to a financial adviser before acting on themes in this article.)
I see a better opportunity in financial services that cater to an older, wealthier, progressively more tax-conscious Australia. Two standouts are Class (ASX: CL1) and Praemium (ASX: PPS), and my abbreviated investment cases are as follows.
Class is a maker of cloud-based software for the administration of self-managed super funds (SMSFs), the number of which in Australia has grown by about 5 per cent annually over the past few years as more Australians have come to see the benefits of going that route and have the account size to justify the effort.
Class Super has won multiple awards and integrates with 150-plus automated data feed providers, so it should not be too surprising that its market share continues to rise (now above 19 per cent, according to Class). I expect further share gains thanks to a sterling reputation and its first-mover advantage in the cloud.
Class had an excellent fiscal 2016 – revenue increased 45 per cent and underlying EBITDA even faster at 69 per cent – and its 99 per cent customer retention rate is outstanding. The shares are not conventionally cheap today at 80 times trailing underlying earnings, but I think the premium is justified given Class’s high retention rates, numerous awards and significant share gains in a growing market.
It also helps that the balance sheet is in great shape, with no debt and $15 million in the bank.
Praemium has a lot in common with Class. It is also a maker of financial services software and the two companies sometimes find themselves competing. However, I think there’s room for both to thrive as they have different geographic footprints and only a slice of Praemium’s business competes head-to-head with Class.
Praemium is gaining speed thanks to the continued rise of separately managed accounts (SMAs), which are a tax-efficient way for individuals to access professionally managed portfolios. However, the actual administration of SMAs is cumbersome for investment managers, and Praemium steps in with its scaleable and efficient platform that connects investors, investment managers and wealth managers.
Praemium has a sticky, growing customer base, and its two core economic engines, its SMA platform and V-Wrap portfolio administration platform, both posted solid growth in 2016. Overall underlying revenue increased 29 per cent, with underlying EBITDA increasing much faster at 234 per cent as the company recently tipped into profitability.
The shares have had quite a run, and profits will not keep growing at such a fast clip, but they should still rise faster than revenue over the long haul because of the scaleable nature of Praemium’s businesses. But the company’s growing SMA platform and improving prospects in the UK should keep the top-line rising for many years to come.
About the author
Joe Magyer is the chief investment officer of Lakehouse Capital Pty Ltd (ACN 614 957 603). This article contains general investment advice only (Lakehouse Capital Pty Ltd is the Corporate Authorised Representative of The Motley Fool Australia Pty Ltd AFSL 400691). The Motley Fool owns shares of Class. Follow Joe: @Magyer
Joe Magyer is the chief investment officer of Lakehouse Capital Pty Ltd (ACN 614 957 603). This article contains general investment advice only (Lakehouse Capital Pty Ltd is the Corporate Authorised Representative of The Motley Fool Australia Pty Ltd AFSL 400691). The Motley Fool owns shares of Class.
Follow Joe: @Magyer
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