Last updated: 20:12 / Wednesday, 14 December 2016
Column by SLI

The Ageing World - Global Equity Opportunities

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The Ageing World - Global Equity Opportunities

The changing demographics and the ageing populations in many regions have led to top heavy societies. In the developed world the issue of changing demographic profile needs no explanation and whilst the changes happen at glacial pace they really matter.

We found some statistics about the changing global demographics eye opening:

  • Currently there are 20 countries with declining populations; by 2050 this is expected to be 80 countries.
  • In the not too distant future it is expected that all of the main economic forces in the world will see a decline in their working population apart from the US.
  • Germany needs 650k net migration every year for the next 20 years just to keep the workforce flat.

The changing demographics and ageing population profile of different regions has originated some new investment ideas. For global equity investing, it is important that we identify companies where there is a positive change in their business or operating environment, but the stock market valuations and forecasts are not fully reflecting the implications of such change.

Some companies are set to benefit from the changing demographics and aging populations, such as those with a core business on accommodation for the older generations and healthcare.

In the UK, it is forecast that the number of over 55’s is growing at twice the rate of the UK population average, implying that in 15 years’ time there will be approximately one third more over 55’s than there is today.

One of the companies looking to benefit from this changing demographic is McCarthy & Stone, a leading UK retirement home builder. According to McCarthy & Stone, it accounted for 70% of this niche privately-owned retirement accommodation in the UK, focusing on selling homes to over 55’s. The McCarthy & Stone products are priced to attract older residents wishing to downsize and release equity. The facilities are custom built for the demographic they serve and include common spaces and house managers although the accommodation still provides separate living.

When looking for opportunities in the global equity universe, it is important that we constantly meet with companies and discuss industry trends with their peers, suppliers, and other companies who serve the same end market so as to build a view on the strength of different companies’ potential customers, test our investment thesis and challenge our non-consensus angle.

From our analysis, McCarthy & Stone’s internal transformation programs are expected to lead to greater margins than the market expects. Their land bank acquisitions have been executed at better gross margins than the market believes, which is driven by higher hurdle rates set by management.  It is believed that they are capable of accelerating completions above the targeted 3,000 pa.

Another interesting example is Orpea, a French listed operator of high end nursing homes with majority of the business in France currently. However, due to limited licences being granted in France, this company has focused the growth overseas, primarily in Europe but also with one early stage venture in China.

By understanding the company's on-the-ground approach to M&A and their international greenfield expansion plans which are already in motion, we believed that sustainability of 5% M&A growth and acceleration of organic growth to above 5% from 2018 is not in consensus numbers.

Regulation around licences and the inability to do a deal to buy scale makes it hard for competition to present a large threat in their markets. There are no new licences being granted in France and besides Orpea and Korian there are no large competitors. In addition, there is a hugely inadequate stock of specialised care beds for the last stages in life. Growth opportunities therefore exist for a top end operation like this where the focus is on providing very high quality care home for the older generation.

The changing demographic profile in different regions bring challenges but also investment opportunities. Market very often is not fully appreciating the positive implications of some of those positive changes companies are undergoing – investors should focus on identifying such opportunities.

Column by SLI written by Mikhail Zverev, Head of Global Equities, Standard Life Investments
 

About Mikhail Zverev

Mikhail is the Head of Global Equities at Standard Life Investments, where he also serves as a portfolio manager on a number of Global Equity funds. Mikhail started his career in 1998 with Trigon Capital, an Eastern European investment banking firm, where his focus was on technology investment banking. He gained his MSc Accounting and Finance from London School of Economics and joined the investment banking division of Schroder Salomon Smith Barney in London in 2001, before moving to First State Investments as an Analyst, UK equities in 2002.

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