Investing in population growth

When it comes to population, it seems bigger is not always better.

Summary: The world’s human population is growing, with India set to overtake China within 15 years. Europe’s population is in decline, while Australia’s is forecast to almost double by the end of this century.
Key take-out: The link between population growth and aggregate GDP growth is strong, but only when compared to aggregate growth and not per capita growth. Secondly, the relationship to sharemarket returns is weak.
Key beneficiaries: General investors. Category: Economics and investment strategy.

There is an ongoing maxim in finance that goes along the lines of “you can’t go wrong investing in areas with strong population growth”. The reasons seem pretty straight forward, yet the evidence shows that a negative relationship exists.

In this article I will look at where the population growth is coming from and answer the question: Is population growth a good proxy for investors?

Current understanding of population growth

Every few years, the intelligent bunch at the United Nations updates their spreadsheets and produces a 50 page report of their latest findings. It should come as no surprise to many readers that the human population is exploding, but to provide the most recent numbers it is now predicted that the world population will not peak in 2075 (as it was estimated as recently as 2004) but rather keep on growing. This is all based on their “medium forecast” which now predicts continued growth, comprising approximately 9.6 billion people in 2050 and 10.9 billion people in 2100.

Interestingly, Australia is one of the countries with the biggest upward amendments to its forecasts. Previously, the UN had predicted in 2004 that Australia would have stagnated and only has 24.58 million people by 2100, however their latest report now estimates it will be a staggering 41.49 million.

Therefore, Australia will be home to 16 million more people.

The dramatic change in forecasts has led some people to discredit their findings and others to use it as an investment spruik. However, one must realise the inherent dangers with any long-term predictions – namely the assumptions on birth rates, life expectancies and migration rates.

According to the UN, Australia’s population change is not due to increased fertility, but rather a dramatic shift in our migration rate.

Which country is growing fastest/slowest?

Putting Australia aside, there were many other noteworthy facts about the global population.

Firstly, the world population is growing by over 100,000 people every day. India is the stand-out in numbers, adding 8,600 people per day and on track to replace China as the world’s most populated country in 2028. Nigeria was also a stand-out, set to match China’s population by 2100.

On the other side of the fence is Japan and Russia. Japan’s population is set to fall from its 2013 level of 127.1 million to just 84.5 million by 2100. Similarly, Russia’s population will fall from 142.8 million to 101.9 million by 2100.

In both cases, more than 40 million people will effectively disappear due to dwindling birth rates.

In fact, Russia forms part of a Europe wide demise. The UN reported that, “From 2000 to 2100, Europe’s share of world population is cut in half, 12.0 to 5.9 per cent, while Africa’s almost doubles, from 13.1 to 24.9 per cent.” With this context, it opens a forum of which a discussion can be made about the investment case in these countries.

Should we be long on Africa and short on Europe?

The theory is that a higher population leads to greater economic outcomes – from economic growth to corporate profitability, it is assumed that all boats should rise if the tide is rising.

But this is hotly contested. Some great work has been completed by Elroy Dimson, Paul Marsh and Mike Staunton who found that a strong correlation exists between population growth and aggregate GDP (total economic growth) of the given country.

The link between population growth and aggregate GDP growth is strong – which seems intuitive and insightful. However there were two major problems that the trio found. Firstly, the link is only strong when compared to aggregate growth and not per capita growth, meaning the added benefit to existing citizens is arguable. The second problem is that the relationship to sharemarket returns is weak.  

What happens when Australia’s population booms?

With the sudden change in Australia’s forecast, we now need to consider the implications.

In Australia, we can source specific data from June 1981 on population changes and their impact on the sharemarket. Now is the time to read carefully…

When our population is growing at more than 1.5% the sharemarket averages -1.81%, meanwhile when the population is growing at less than 1.5%, the sharemarket averages 12.22%.

For the un-mathematically minded amongst us, the evidence is counter-intuitive and suggests that the sharemarket performs worse when the population is growing faster (a negative correlation of -0.125 exists reflecting similar findings to that of Dimson, Marsh and Staunton).

Ironically, it seems that the population growth maxim is a myth. We don’t have an exact reasoning for this, but the evidence seems substantial and it leaves a lot (or little depending on your outlook) to ponder about as an investor.


This is an edited version of an article which first appeared in “The Investing Times” newsletter, which is published by Lachlan Partners and to which Scott Dixon is a regular contributor.