Growing silver economy signals big winners

Over the past three years, Japanese people bought more nappies for adults than they did for babies. The "silver" economy, born of greater longevity and declining birth rates, is with us.

We tend to think of this as a negative phenomenon. As the Japanese statistic indicates, the idea of a world of greater longevity, where the very elderly outnumber the very young, is alarming. This is so, even though many of us want a longer life, and even though the statistic has only been made possible by the remarkable victories of medicine in increasing global life expectancy by 20 years between 1950 and 2000. It opens up a new realm of difficult moral dilemmas.

The phenomenon is almost universal. Japan is the world's oldest country, and Europe its oldest continent, but the fastest growth in the elderly population in the decades to come will be in the emerging world, particularly China.

Within finance, ageing is also viewed as a problem. The savings industry largely grew up to guard against the risk of dying too soon - through life assurance. It has yet to complete its transition to guarding against the risk of living too long.

The pressure on pensions has already shown itself in the move from defined benefit plans, which promise a set income in retirement, to defined contribution plans, which do not. Growth in longevity, even more than the low bond yields that make it hard to guarantee an income, have put pension plans under duress. According to the US Society of Actuaries, every extra year of longevity raises pension liabilities by 9 per cent.

Personal choices have not helped. According to the American Association of Retired People, members of the post-war "baby boom" generation have average retirement savings of $50,000 - not enough to finance a retirement of several decades.

Add to this the growing problem of funding long-term care, and a new cycle of lifetime savings in which lives not only go on for longer, but in which expenditure now increases significantly in the last few years, and longevity can be revealed as a central challenge of the next generation.

These problems do, however, create some opportunities. Sending capital towards those trying to ensure that longer life is a blessing and not a curse could well prove to be very profitable.

That is the thesis behind The Silver Dollar, a huge report published by Bank of America Merrill Lynch. In what its author, Sarbjit Nahal, describes as a "longevity revolution primer", the bank has come up with a list of more than 160 stocks that might benefit from greater longevity.

These involve three entry points. First, and most evidently, there is the pharmaceuticals and healthcare sector, which must shift emphasis towards chronic illnesses that occur most in old age, and towards the medical devices that the elderly most need. Second, there is an opportunity to invest in financials which will provide the funding for longer lives. Finally, there are consumer opportunities.

Among healthcare groups, some of Merrill's ideas seem obvious, such as Zimmer. Trading at more than 24 times trailing earnings, and having rallied for many years, it looks like many are alive to the prospects for walking frames.

Others are less evident. The penetration of visual correction products is low in the emerging markets, according to Merrill. In combination with ageing, this could create an opportunity. Similar arguments apply to hearing aids. Demand for treatments for diseases such as diabetes and dementia can only increase.

Indeed, the potential impact of rising longevity is so obvious that there is a great risk of short-term bubbles as new technologies come to market. The recent excitement in biotech is only one example.

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Among financial services groups, Merrill's guesses at companies that are best positioned for the new challenges include AMP, Legal & General, Lincoln National, Principal Financial and Prudential Financial. Common threads are to look for insurers that are international (the greatest opportunity will come in Asia) and that have already managed a transition towards pensions products.

As for consumption choices, many are counterintuitive. Baby boomers in the US want to keep doing the things they have always done. People over 50 account for 64 per cent of US casino visitors, and more than half of those over 65 gambled in the last year. Boomers like travelling, and they care for their appearance. European women over 60 account for 34 per cent of the facial skincare market, for example - double the share of those under 25.

These are long-running trends. The long-term winners may not even exist yet (just as Google and Facebook did not go public until years after the dotcom boom). And there are risks for everyone. Paying for the boon of a longer life will be costly. But there are some positive opportunities and it is worth exploring them.

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