Baby Bust: Economic Implications and Investment Strategies

Boomernomics

[‘bü – mәr- ‘nä-miks]

noun

An Investment strategy to capitalize on the consumption patters of the baby boomer generation

From Investopedia

The Baby Boom was a post-WWII era characterized by an unprecedented number of births. As the cohort aged, infrastructure adapted to its size with many schools and homes being built from the 1950s through the 1970s. As this demographic ages, there will be a shift to different habits and spending by the cohort and the government to adapt to the aging of the cohort. The term Baby Bust refers to the rapidly increasing number of elderly people as a result of the effects of the Baby Boom.

Canada (Left) and US (Right)

Source 1

The first wave of the baby boomers aged 70-78 is on pace to far outweigh the number of post-war non-baby-boomer births, and the second wave of the baby boomers aged 60-69 also begins to take over the post-war births.

Canada (Left) and US (Right)

Source 2,3

As the population ages, the younger population is unable to sustain the population growth rates. Fertility rates in both Canada and the US have declined, with Canada currently at 1.5 below the replacement rate and the US at 2.

Canada (Left) and US (Right)

Source 4,5

In previous centuries, as the population aged, the population would decline. However, as life expectancy has rapidly increased, the baby boomers, more than any other generation in history, will maintain their population as they age.

Canada (Left) and US (Right)

Source 6,7

A result of these combined factors is a large increase in expenditures and investments in the healthcare system. To gain further insights into the effects of the aging baby boom, we can contrast both the Canadian and American economies to a much older population, like Japan.

Japan in 2005 (Left), Canada 2023 (Middle) and US 2023 (Right)

Source 8

As we can see in the graph, the US has a far more leveled age pyramid with fewer bumps compared to Canada. Furthermore, the US has a higher youth population, most likely due to being above the replacement rate. Canada has a far older population, better resembling Japan, and therefore for drawing direct comparisons to get insights into a proper ‘baby bust’ economy, only Canada will be contrasted.

Now that we have an economic comparison, we can draw the future effects the baby bust will have on Canada by looking at sectoral financial and economic shifts of Japan post-2005. Below are the overall trends in sectoral growth/expansion. While it would be beneficial to know from a capital markets perspective how these sectors performed due to the lost decade in Japan, it's not a feasible observation that can be made.

Japanese 2005 vs Canadian Growth

Japan 2005- 2010; Canada 2025-2030
- Healthcare and Pharmaceuticals
- Medical Devices and Equipment
- Insurance
Japan 2010-2015; Canada 2030-2035
- Senior Housing and Real Estate
- Healthcare Services
- Consumer Goods
Japan 2015-2020; Canada 2035-2040
- Robotics and Automation
- Financial Services
- Leisure and Travel

Another method in which we can determine the growth of individual industries and sectors is by creating analytical models to determine when investments into infrastructure are going to be made.

Source 9

As we can see, there was a boom in scholastic infrastructure approximately 5-15 years after the first baby boom, lining up with the enrollment age of the cohort at the time.

The model was made by looking into the creation of scholastic infrastructure, specifically elementary and high schools in the Toronto region, and comparing the timing of these buildings to the age difference between high school and elementary enrollment along with the estimated demographic makeups of sectors. Below is an example of the model for long-term care home infrastructure being built.

Decade	Forecasted Number of Retirement Homes Built
1950s	2
1960s	4
1970s	6
1980s	37
1990s	35
2000s	7
2010s	25
2020s	169
2030s	139
2040s	59
2050s	15
2060s	18
2070s	5
2080s	3

As we can see, based on the model, there is a large buildup of long-term care homes in the late 2020s and into the 2030s. This further lines up with the population pyramid estimate made of Japan’s 2005 population resembling Canada’s and how this times into sector growth for long-term care homes. As shown, within the next 5 years, there will be a large amount of investment into Canadian long-term care homes, making stocks such as Sienna Senior Living, Chartwell Retirement Residences, and Extendicare attractive.

Below is the code used for model which would allow the modelling of individual sector growth giving small changes in the parameters of the code:

import pandas as pd

import matplotlib.pyplot as plt

# Data from the TDSB School Build Date Analysis image

school_data = {

    "Decade": ["1880s", "1890s", "1900s", "1910s", "1920s", "1930s", "1940s", "1950s", "1960s", "1970s", "1980s", "1990s", "2000s", "2010s"],

    "Elementary": [1, 4, 2, 31, 26, 5, 18, 144, 110, 49, 10, 15, 3, 3],

    "Secondary": [1, 0, 4, 6, 9, 2, 7, 25, 29, 10, 5, 3, 2, 0]

# Create DataFrame

df_school = pd.DataFrame(school_data)

# Calculate the total number of schools built per decade

df_school["Total_Schools"] = df_school["Elementary"] + df_school["Secondary"]

# Assumption: The number of retirement homes built will follow a similar trend to the number of schools built

# Assuming a 70-year lag (people born when the schools were built will need retirement homes 70 years later)

df_retirement = df_school.copy()

df_retirement["Decade"] = ["1950s", "1960s", "1970s", "1980s", "1990s", "2000s", "2010s", "2020s", "2030s", "2040s", "2050s", "2060s", "2070s", "2080s"]

df_retirement["Retirement_Homes"] = df_school["Total_Schools"]

# Plotting the forecasted retirement homes based on the number of schools built per year

plt.figure(figsize=(12, 6))

plt.plot(df_retirement["Decade"], df_retirement["Retirement_Homes"], marker='o', linestyle='-', color='b', label='Forecasted Retirement Homes')

plt.xlabel('Decade')

plt.ylabel('Number of Retirement Homes Built')

plt.title('Forecasted Number of Retirement Homes Built per Decade')

plt.xticks(rotation=45)

plt.legend()

plt.grid(True)

plt.show()

df_retirement

Another way in which Canada will be highly impacted by the Baby Bust is in Wealth Transfer and Changing Investment Appetite.

“A seismic quantity of wealth to the tune of $1 trillion is set to move from Canadian baby boomers to their GenX and millennial heirs between now and 2026. It’s predicted to be the largest generational transfer of wealth in Canadian history” [10]

Considering Canada's $2.1 trillion GDP, a $1 trillion wealth transfer acts as a large stimulus. Furthermore, the ways in which wealth is preserved, grown, and maintained will change. As the baby boomer ages, investment preference will shift to more conservative investments such as bonds, fixed income, dividend stocks, and REITs. As the wealth transfer occurs, we can expect the recipients to invest it into more tech-aligned stocks of companies that they know and love such as Apple, Uber, and Meta. Private Wealth management and preservation services should grow along with health/healthcare-oriented businesses.

One of the best ways to invest in the Baby Bust going forward is by contrasting Japanese 2005 to Canadian Future Growth (Once again, as per the disclaimer on the blog section, this is not investment advice intended for use). If this is done, it's best to do it pre-emptively as the stock is likely to perform even before sector growth occurs. For example, for two of the stocks provided for retirement homes, Sienna Senior Living (TSE:SIA) has performed 26.26% YTD, and Chartwell Retirement Residences (TSE:CSH.UN) has performed 34.83% 1 Year.

The Baby Bust provides a ripe investment opportunity. By taking lessons from its effect on Japan, we can give a fairly accurate estimation of the sectors that are poised to benefit the most from it. This blog provided both an estimation of the sectors that will see the most growth every 5 years along with a computer model that allows individuals to approximately determine when the Baby Boom cohort will age into infrastructure causing a demand in its growth. By doing this, investments can be timed into industry and sector-exposed ETFs or individual stocks to gain from this socioeconomic trend.

Source

Baby Bust: Economic Implications and Investment Strategies

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