I’m sick of hearing the same old faulty argument: “When baby boomers get old, health care stocks will benefit…retirees are starting to travel, so buy Expedia…boomers will buy retirement homes in Florida…”

In the next 20 years, so-called “baby boomer” stocks will make you no money. Boomers might be spending more on health care, travel or real estate. But that doesn’t necessarily mean those stocks will make you money. In fact, they will lose you money.

Here’s why…

Typically, the elderly sell their assets to fund their retirement. Yes, there is Social Security, but a large portion of retirement money comes from the sale of stocks and other assets. Very soon, boomers in the U.S., Canada and Europe will sell their assets to fund retirement.

So there will be phases of exodus from U.S. stocks. This could easily cause the stock market to fall further. When boomers sell their assets and retire, who will buy the trillions of dollars of assets accumulated by this generation of 80 million people?

The answer lies on the other side of the world…

“Expand your horizons and think of the world as one economy, instead of separate nations, each one attempting to provide goods for its own citizens. Although the developed world is aging rapidly, the rest of the world is very young,” explains Wharton professor Jeremy Siegel (whose book, The Future for Investors, I highly recommend):

“The young of the world can produce the goods for, and buy the assets from, the retirees of the developed world. For more than 80% of the world’s population, there is no age wave.

“Something extraordinary is happening in these young, developing countries. For the first time, China and now India have launched into a sustained period of rapid growth. Their growth, if it can continue at the levels achieved over the past decade, will have an extremely significant effect not only on their countries but on the rest of the world as well.

“Growth in the developing world will be fueled by the explosive growth of exports to the aging world. These young countries must find an outlet for the dollars, yen and euros they receive from their exports. Despite the rapid growth in their own economies, they will find U.S., European and Japanese assets attractive for their brand names and their managerial, marketing and technical know-how.”

At the same time, the age wave will cause a severe dearth of workers in the developed world. By midcentury, it is expected that the most populated age bracket in Europe will be 75-80 years old. And by 2050, for every four children under the age of five, there will be a Japanese man or woman over the age of 100. By 2030, the number of workers in Germany will have fallen by 25%.

Where will the workers come from? Again, the answer lies in the developing world.

According to Siegel, “The next half century will see a massive exchange of goods for assets that will not only shift the center of the world economy eastward but also negate the destructive impact of the age wave on asset prices and retirement opportunities.”

Given the demographics of the developed world and its impending age wave, where should you invest? It makes sense to look at countries that have exact opposite demographics. China and India are obvious choices. But you will find better valuations in these lesser-known countries.

Brazil makes up one-third of Latin America’s population. It is also one of Goldman Sachs’ favorite investment destinations. Goldman Sachs expects Latin American economies will produce more output that the U.S. by 2040. You can own all of Brazil’s stocks for the long run through the iShares MSCI Brazil Index (EWZ:AMEX).

Indonesia has the world’s fourth largest population. The median age of this 230 million-strong population is just 26. Coca-Cola, Unilever and Campbell Soup Co. are all using Indonesia as a base for their Southeast Asian exports. I was in Indonesia last week, and the consumer potential of this massive population is obvious. The Indonesia Fund (IF:AMEX) and the country’s telecom giant PT Telekomunikasi (TLK:NYSE) are two ways to gain long-term exposure to this country. But given its recent political and financial volatility, you’re better off putting Indonesia on a watch list for now.

Another region that has a very young population and great potential for selling goods and services to the aging developed world is sub-Saharan Africa. According to Siegel, “The region has over 735 million people, or 11% of the world’s population. This part of the world also has the youngest population and the highest birth rates, so that by 2050, sub-Saharan Africa will have 1.8 billion people, making up almost 20% of the globe’s population. The sheer size of this population means that its growth path will be important for the rest of the world.”

Large, young populations of the developing world are the answer to the age wave. If you want a true baby boomer play, don’t invest in what boomers are buying. Rather, invest in the countries that will buy their retirement assets and fill in for them in the work force.

Regards,

Sala Kannan
June 16, 2006

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