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4 share ideas that could benefit from an ageing population

With the proportion of the global population over 60 expecting to nearly double between 2015 and 2050, we look at 4 share ideas that could benefit from an ageing population.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Between 2015 and 2050, the proportion of the global population over 60 is expected to nearly double, with the over 60s accounting for 22% of all humans. In the UK the shift is happening even faster, with the over 65s expected to make up over a quarter of the population by 2066.

As we age, our spending habits change. No more people-carriers to ferry the family around and fewer new sofas (chances are your house is already well furnished). But perhaps more holidays abroad, more spending on hobbies like gardening and golf and, unfortunately, an almost certain increase in visits to the doctor.

As an ever-larger proportion of the population falls into older age groups, that will have some profound effects on the economy and, by extension, investors.

This article isn't personal advice. If you're not sure whether an investment is right for you, seek advice. Investments and any income they produce will rise and fall in value, so you could get back less than you invest.

Ageing populations and inflation

An ageing population has two important and connected consequences for the wider economy.

Firstly, it means the relative size of the workforce is likely to decline. As we’ve seen recently, a shortage of labour can quickly feed through to higher prices across the economy, boosting inflation.

Secondly, those in retirement will start drawing down on and spending their retirement savings. A fall in the overall savings rate and increased spending should, all things being equal, create more inflation and push up interest rates.

However, there are other forces at work in the economy. In particular, technological advances reduce the amount of labour needed for a certain level of output, while high levels of debt also create incentives to keep interest rates low. Where the various forces end up leaving inflation remains to be seen. Either way ageing populations will have a significant impact on financial markets in the years to come.

Investing in an ageing population

As well as the wider economic impacts, an ageing population has the potential to significantly affect the performance of individual companies. In particular, companies who address the needs and wants of older customers may find themselves in a stronger position as time goes on.

Investing in individual companies isn't right for everyone – it's higher risk as your investment is dependent on the fate of that company. If a company fails, you risk losing your whole investment. You should make sure you understand the companies you're investing in, their specific risks, and make sure any shares you own are held as part of a diversified portfolio.

Legal & General – funding retirement

Legal & General is, first and foremost, a life insurance company. The group manufactures and sells annuities for retirees – both individually and through corporate pension schemes.

Final salary, or more technically defined benefit, pensions schemes have been in decline for years, and very few companies offer them today. That might reasonably leave you asking what the future holds for the company. However, it’s shifted into offering a wide range of retirement focused financial products with scope for growth in the future.

The first is a market-leading defined contribution pension product. Familiar to most workers today, these schemes allow employees a tax efficient way to save for their retirement, but there’s no guaranteed payout at the end. Instead, individuals’ money is invested and they‘re to withdraw or access the income produced by their investments in retirement.

Legal & General collects a management fee on money while it’s invested. It’s currently managing some £112bn+ on behalf of retirees, with £11.1bn coming in last year. With longer retirements ahead, we’re likely to have to save more overall and start a nest egg earlier – both of those outcomes leave Legal & General charging management fees for longer.

The group has also launched lifetime mortgage products, aimed specifically at the retiree market. These equity release products allow houseowners to realise some of the value of their properties now at no up-front cost. That could be used to fund retirement costs, make home improvements or pass money on to children. The interest on the loan is eventually paid out of the estate or when the house is sold. It’s a growing part of the business, with £791m in new loans issued last year.

From an investor’s perspective, these and other financial products tailored to older customers could offer a source of growth for years to come. Paired with the recurring nature of much of Legal & General’s business, that underpins a prospective dividend yield of 6.8%. Remember though, there are no guarantees, and yields are not a reliable indicator of future income.

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Zimmer Biomet – keeping the body moving

An unfortunate but inevitable part of ageing is that things start to wear out, particularly joints like hips and knees. That’s where Zimmer Biomet comes in.

The group is the world’s largest supplier of hip and knee implants. While it also has expertise in sports medicine, trauma, dental and spine, joint replacements accounted for over half of revenue in 2020. And that was despite delays to non-essential operations during the pandemic.

The group managed to keep losses to a minimum despite the disruption, at just £138.9m. And with free cash still comfortably positive, Zimmer has emerged from the pandemic in pretty good health. Elective surgery delayed during the pandemic doesn’t mean underlying conditions have simply gone away. The backlog still needs clearing, and could well lead to a bumper year or two going forwards.

We suspect a reasonable position in the Asian Pacific region, some 18% of sales, also bodes well for long-term growth. The region currently has a comparatively young population, but could see demand increase rapidly as healthcare provision improves in many markets.

The Americas currently account for well over half of sales. So if recent crackdowns in US healthcare costs spread to medical devices, exposure to Asia could be particularly useful. The timing of a recovery in elective surgery is also uncertain. The pandemic continues to disrupt the healthcare industry and problems could extend to the group’s supply chains too. Investing should always be for the long term though, and on that basis, we think the group has what it needs to weather short-term disruption.

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Primary Health Properties and EMIS – health on the doorstep

A hip and knee replacement is probably at the more dramatic end of the healthcare spectrum. But older people have been found to make greater use of everyday services like GPs too. That suggests the NHS will have to invest in new and more sufficient GP services over the years to come. That’s an area where several UK listed companies are investing heavily.

Primary Health Properties is a real estate investment trust (REIT) which owns 514 purpose-built GP surgeries in the UK and Republic of Ireland. These facilities often combine GP services with community nursing services and community pharmacies – helping to deliver a better and more efficient service to patients.

As a REIT, the company is primarily focused on returning rental income to shareholders through dividends, with a prospective yield which currently stands at 4.2%. Remember though that yields are variable and not guaranteed.

The group benefits from having NHS backing for most of its rents. This helps offer a degree of safety, as well as an average lease length of 11.8 years, providing a clearer view of revenue far into the future. However, the fact the group has to pay out most of its rental income does mean it relies on issuing shares to fund future growth. So investors could be asked to put their hands in their pockets in the future.

While Primary Health Properties is focused on the bricks and mortar of primary healthcare, EMIS looks to make visits more efficient and perhaps keep patients away from the surgery altogether. The group provides practice management software to well over half of GP’s in the UK, while also serving the A&E and community pharmacy market. It also provides direct to patient services through the Patient online business – which allows online booking, ordering repeat prescriptions and access to online medical information.

As a software provider, the group should be very cash generative. Developing the software is expensive and time consuming, but once it’s up and running each new customer is essentially all profit. That’s helped it deliver operating profit margins of nearly 25%, while more than 100% of operating profits dropped through to cash last year.

The pandemic has increased the urgency of digitising aspects of the NHS, and EMIS is right at the heart of those efforts. That could mean increased investment in the short term, but could also be a long-term growth opportunity. We suspect we’re not alone in that feeling, given the shares currently trade on a price to earnings ratio of 24.2 times earnings, some way above the longer-run average of 19.7.

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VIEW THE LATEST EMIS PRICE AND HOW TO DEAL

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The author owns shares in Legal & General Group plc.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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