In 1751, Benjamin Franklin wrote the 18th-century equivalent of a listicle. His essay "Observations Concerning the Increase of Mankind, Peopling of Countries, etc." outlined two dozen ways in which marriages, births, deaths, race, labor, and other demographic trends would impact the country.
Franklin, it turns out, was ahead of his time.
Today investment strategists and economists know all too well that demographics play a profound role in the fortunes of economies, markets, industries, stocks, and ultimately investors. It stands to reason that if investing is about figuring out what the world might look like in a decade or two—so you can determine who the winners and losers will be before it becomes clear—you can't ignore cultural, social, and generational patterns when it comes to your portfolio.
Without appreciating the cultural and economic significance of the baby boomers, for instance, investors would have had a hard time anticipating the consumer boom of the 1980s and '90s. And without recognizing China's industrial revolution, investors would have been hard-pressed to predict the bull market in commodities in the 2000s.
"The point is to invest in themes humanity cannot ignore," says Dave Haviland, lead portfolio manager at Beaumont Capital Management.
What are such themes going forward? Here are five generational, social, and cultural trends that are likely to have a big impact on the global economy—and your portfolio—in the years to come.
1. Millennials Take Root
"Every major expansion and [big] bull market has been driven by a baby boom entering its household-formation years," says Dan Wantrobski, director of research at Janney Montgomery Scott.
While much has been written about how millennials have been slow to leave the nest, Americans born between 1982 and 2000 already make up the biggest group of homebuyers, accounting for more than a third of all purchases, according to the National Association of Realtors. And that's with the youngest members of this generation still in high school.
Over the next 15 years, as millennials enter their prime nesting years, the number of new households being formed is expected to reach all-time highs, Wantrobski says.
Investing opportunity: The coming of age of millennials bodes well for the overall economy, but it's a particular boon for real estate, which has been gradually healing since the mortgage meltdown and financial crisis. An obvious way to tap into this shift is to bet on homebuilders, says Haviland, who counts iShares U.S. Home Construction ETF (ITB) among his recent holdings.
Thanks largely to millennials, between 1.3 million and 1.35 million new households are expected to be created annually over the next five years, according to forecasts by Morgan Stanley. That's 30% higher than the long-term average annual increase.
Meanwhile, the inventory of listed homes for sale is near a 20-year low. Something has to give.
Among the biggest holdings of iShares U.S. Home Construction ETF are D.R. Horton (DHI), Lennar (LEN), and PulteGroup (PHM), the country's three largest homebuilders.
But it's not just home construction that stands to benefit. "When you have any large population [group like millennials], it dictates the tempo of society," says William Smead, founder of Seattle-based Smead Capital Management.
In addition to Lennar, Smead owns shares of Home Depot (HD), the world's biggest home-improvement retailer, and JPMorgan Chase (JPM), the country's second-largest originator of home mortgages, which stand to benefit as twentysomethings put down roots.
"The categories that performed well over the last several years— think craft beer, travel, social media—appealed to single people," Smead says. For cues into the next decade "just follow a couple with a 2- and 4-year-old around, and you'll get a good idea," he says.
2. Boomers Take Drugs
It's no secret that baby boomers—the more than 70 million Americans born between 1946 and 1964—are getting older. "There are 10,000 boomers retiring every day, and between 2000 and 2060 the number of people over the age of 65 is expected to double," says Haviland of Beaumont Capital.
While that has huge implications for financial services, as retired investors remake their portfolios, a more immediate impact is being felt in a different sector: health care.
"It's almost mathematically impossible for there not to be a huge increase on prescription pharmaceuticals," says Smead of Smead Capital.
Investing opportunity: Spending on prescription drugs in the U.S. is indeed expected to climb—4% to 7% a year through 2021, according to QuintilesIMS Holding. That's more than twice the recent annual pace of inflation and well in excess of the projected 2.2% growth rate for the U.S. economy during that stretch.
Though health care has been among the better-performing sectors of the market in recent years, the full impact of this demographic tailwind is still underappreciated, market watchers say. So if you're relying on an S&P 500 index fund as the core of your portfolio, you may want to supplement the 14% exposure that such index funds have to this sector.
Among the top holdings in Smead's fund, Smead Value (SVFAX), are Amgen (AMGN), whose Repatha cholesterol drug is linked to a 20% reduction in heart attack and stroke risk; and Walgreens Boots Alliance (WBA), the retail pharmacy chain that also has a stake in the drug distributor AmerisourceBergen.
Haviland uses exchange-traded funds, not stocks, to build strategic portfolios. His picks for health care include the SPDR S&P Biotech ETF (XBI). One of the fund's top holdings is AbbVie (ABBV), whose key drug Humira is used for the treatment of rheumatoid arthritis. By 2040, more than 26% of adults—or 78 million people—will be diagnosed with some form of arthritis, according to the Centers for Disease Control and Prevention.
3. Cities Swell
In America, cities are enjoying a resurgence as empty-nesters are downsizing from their big suburban homes and moving back downtown. But overseas, urbanization is taking place on a much larger scale.
Asia and Africa, for instance, are in the midst of a massive migration to city centers. By 2025 more than half the world's population will live in Asian cities, according to the United Nations. "We are living in a unique point in history where the pace of urbanization is unprecedented," says Taimur Hyat, chief strategy officer for PGIM, the global investment management businesses of Prudential Financial. "Every year, 60 million to 70 million additional people move to cities." That will require serious infrastructure, he says, to the tune of $50 trillion in spending through 2030.
Investing opportunity: While a good deal of this money will be spent in a traditional manner—to construct roads and sewer lines—other forms of infrastructure that stand to benefit include data centers and logistics and storage facilities that support e-commerce.
Meanwhile, the trend toward urbanization goes hand in hand with the emergence of a growing middle class in many developing countries. And when that occurs, economies tend to shift from an export-driven focus to domestic-driven growth.
"One billion emerging-market consumers are expected to join the middle class by 2025," Hyat says, adding that this should boost demand for goods and services that middle-class consumers in the West already enjoy. This paves the way for opportunities in everything from e-commerce to financial services.
Top holdings among the Prudential Jennison Global Opportunities Fund (PRJAX), for example, include Tencent Holdings (TCEHY), China's largest Internet service provider, which is also a social media and instant messaging company; and Alibaba Group (BABA), China's largest e-commerce company, which is also a leading cloud-computing firm.
If you're looking for more general exposure to global infrastructure, there's Guggenheim S&P High Income Infrastructure ETF (GHII), which invests in high-yielding stocks tied to the global infrastructure build-out.
4. The Gender Gap Narrows
Investors need only read recent headlines about sexual harassment scandals—from Hollywood to Washington to Wall Street—to understand the push for gender equality is reaching a tipping point.
To be sure, the gender gap still exists. In the U.S., women tend to earn a little over 80 cents for every dollar a man with similar experience earns. Among younger women, the gap is narrower. In 2015, women 25 to 34 earned nearly 90 cents for every dollar men made, according to the Bureau of Labor Statistics.
Meanwhile, women are making big strides in education. Between now and 2026, roughly 23 million more women than men are expected to go to college, according to the National Center for Education Statistics. Add to this the fact that technology is making salaries more transparent, and it's clear the gap is likely to narrow over time.
Investing opportunity: Companies that do well on gender equality—with strong representation of women on their boards and in senior management—tend to enjoy higher returns on equity, lower stock volatility, and more consistent dividend payouts, studies show.
Part of the reason: A more diverse and less-hostile workplace often goes hand in hand with lower turnover and higher levels of employee satisfaction. It's also associated with better innovation and customer relationships.
Betting on gender equality is hard because companies aren't required to disclose gender data. But there are funds that focus on companies leading the charge. The Pax Ellevate Global Women's Index Fund (PXWEX) and SPDR SSGA Gender Diversity Index ETF (SHE) focus on firms that rank high on gender diversity on their boards and in their C-suites.
5. India Enters the Digital Age
China has been the focal point for emerging-market investors over the past decade. But India, whose economy is far less developed, could lead the way over the next. A recent Morgan Stanley Research report projects India is on track to be the fastest-growing economy over the next decade thanks in part to the effects of digitizing its still predominantly cash-based economy.
Since introducing its national identification program in 2010, India has enrolled most of its 1.3 billion citizens, laying the groundwork to increase access to banking and digital payments while modernizing its archaic tax system. Another benefit: "Banks can now lend," says Barrington Pitt Miller, global financials analyst and portfolio manager with Janus Henderson. "As you formalize the economy it allows banks to extend more credit to existing customers and a broader set of new customers" including individuals and microbusinesses.
While banks and financial services firms stand to benefit, Miller says, it's also good for retail, e-commerce, and other consumer companies that are likely to prosper from the freer flow of capital.
Investing opportunity: India has been a mainstay of emerging-market equity funds for years. But Indian shares make up less than 9% of the MSCI Emerging Markets Index, vs. about 30% for Chinese equities. This, despite the fact that India is expected to surpass China as the world's most populous country by 2024, according to UN estimates.
Other reasons to be bullish on India: The country's millennials are starting to enter the workforce in a meaningful way, with the number of young people who are in the labor pool expected to nearly double to 680 million by 2027, according to UN estimates. That's why "GDP growth in India is starting to hockey stick," says Miller.
If you already own a broad emerging-market fund like Vanguard FTSE Emerging Markets ETF (VWO), you can supplement that with a country-specific fund such as Matthews India (MINDX), which invests about a third of its assets in financial firms that stand to benefit directly from the digitized economy.