Haim Israel is a walking encyclopedia of fascinating statistics. As head of global thematic research at Bank of America, he studies the megatrends shaping the global economy that are likely to power investment returns.
Some trends, including the rapid aging of populations in the US and China, and the march toward deglobalization as US-China tensions flare, are unfolding in the moment, while others, such as quantum computing, seem far away. Israel says a triad of crises in recent years—the clash between the US and China, the war in Ukraine, and the Covid pandemic—has shaved the timeline for megatrends to evolve, meaning even long-term investors need to pay attention now.
One example: When Israel took on his current job four years ago, it was expected that by 2030, all new cars sold would be electric or hybrid. Now the timeline has moved up to 2025-27.
Barron’s recently spoke with Israel about what “peak people” means for portfolios, why Gen Z, not millennials, is the generation to watch, and how quantum computing could be an even bigger development for humanity than fire. An edited version of the conversation follows.
Barron’s: What megatrend isn’t getting enough attention?
Haim Israel: How fast the population is aging. We are reaching “peak people.” If you are 50, the global population has doubled during your lifetime. That’s coming to an end. We don’t have enough children. In 50% of countries today, birth rates are coming down and falling below the replacement rate, especially in the Western world.
What are the economics
Emerging markets face a pension-savings shortfall of $106 trillion as their populations age. That’s three times their aggregate gross domestic product. Who’s going to finance that? We are in a deflationary environment long term—beyond the interim two to four years—because the working-age population is decreasing, and governments will have to spend more. But it won’t be on infrastructure or things that will propel economic growth; rather, it will be on pensions and healthcare services that aren’t direct contributors to GDP, which makes this spending more deflationary.
Who benefits from the aging boom?
Home-improvement and retirement communities, life-insurance companies such as
(ticker: PRU), and automation companies like
(HON), as companies deal with a shrinking working-age population in the developed world.
Plus, 90% of the working-age population is going to come from Africa and New Asia—essentially, Asia except for China, South Korea, and Japan. Countries such as India, the Philippines, Vietnam, and Indonesia are enjoying a younger population with rising labor supply and lower dependency ratios.
For example, India will generate close to 183 million more working-age people by 2025 than Germany, France, and Canada combined. Those countries have massive opportunities at their doorstep. If they are re-skilling and investing in the right ways in infrastructure and education, under the right conditions they will have a demographic dividend.
We have long heard about the promise of Africa. What will make this time different?
We are at an inflection point. Automation and changes in the job market are happening here and now. Africa is still dependent on traditional industries that could be replaced by automation, and is seeing massive migration because of climate change. These countries need to spend on infrastructure and re-skilling people. Also, most African countries are importing, not exporting, energy, and [the continent] has an advantage with solar. Investments will have to happen now. One beneficiary of increased investment in Africa is
(HTWSF), a leading telecom tower infrastructure company.
What other demographic trends should investors watch?
We are going to see a great transfer of wealth and consumption power move from baby boomers to Gen Z, passing over Gen X and millennials. Gen Z, born from 1996 to 2016, makes up about 32% of the world population. By the end of this decade, Gen Z will earn more than millennials. Because of the transfer of wealth, we could see Gen Z have more than any other generation, including boomers.
Gen Z is beginning to enter the working world and buy homes. The impact of this generation up to now was neglected. From here on, it will be completely transformative.
What makes them so different?
It’s the first generation born into an online world. More than 80% of the Gen Z shopping experience starts online, and they will only go to the mall if they have no choice.
They don’t bank as we did: They won’t use credit cards or cash, but payment apps. And they are conservative in terms of credit—so, fewer mortgages and student loans. This is a generation that doesn’t want to cap their experience of life by taking out loans, and doesn’t see the value of a bigger house and more stuff.
They also aren’t driving—there’s a 50% drop in driver’s licenses in the Western world versus the former generation. It’s expensive, irritating, and takes them off their smartphones, and it isn’t environmentally friendly. They are going to have more money than any other generation, and they think differently. Every industry not thinking in those terms will be challenged.
The middle-class consumer in countries like China has been a popular investment theme. Does it hold up?
It’s the biggest theme in the world. A lot of the actions the government in China is taking, in terms of the crackdown on after-school education companies and financial services, are aimed at protecting this middle class. We will see more reforms aimed at helping them.
China, though, has the most-aged population on the planet, and in a world of deglobalization, China has a lot to lose. There are massive challenges ahead, but you have to look at the potential, as well. We live in a world of data and technology. We always say that if data were oil, China would be the new Saudi Arabia. It has most of the data and is investing so much in technology.
Investors often dismiss geopolitical concerns. Should they?
It’s one of the most important themes. Every six months, we do a “Transforming World” conference and survey participants about what will be the most disruptive, influential theme over the next five years. In the latest survey, 50% named geopolitics and the new world order as No. 1—for the first time. Over the past six conferences, climate change was No. 1.
What is the new world order?
The clash between China and the US continues. Investments in infrastructure with the Belt & Road initiative was one of China’s main weapons to access resources and for world domination. With technology, China is investing as much as the US in research and development, and more in some areas. Shortening of supply-chain lines and reshoring is one way the US is gaining access to more resources, rather than relying on China. That will continue. The new battlefield, after the trade war and tech war, will be climate wars.
What do you mean?
Most of the planet is importing energy. The move to energy independence is going to be key, and whoever controls clean tech in 50 to 70 years will have the leverage. China by far leads in investment in renewable energy, energy storage, and everything around clean tech. Europe isn’t that far away, and the US is trying to close the gap. This geopolitical landscape will lead to high investments in renewable energy.
Yet, Europe is now in the midst of an energy crisis. What are the lessons here?
Clean-tech investments weren’t done in the right way. They did a lot of wind energy but not enough [investment] in energy storage, so energy created wasn’t stored, leading to the energy crisis in the summer before the war in Ukraine.
The war accelerated the understanding that long term you have to be completely independent. But that could take years. Over the short term, we will see an increase in investment in fossil fuels. But the transition [to renewables] has been accelerated.
What investment opportunities does the transition create?
Infrastructure will be one of the biggest beneficiaries, and technologies like hydrogen and nuclear will get more attention. That’s good for companies like
[NEE] and hydrogen fuel-cell technology company
What jobs will be coveted by our children in a couple of decades?
We haven’t invented 65% of jobs Gen Z and Gen C, born after 2016, will work in. Today, we have blue-collar and white-collar jobs. Tomorrow, we will have green-collar jobs related to renewable energy. Another is the empathy market: psychology, doctors—things less impacted by automation—and then we will have gold-collar jobs in technology. Plus, lots of jobs we haven’t even considered—related to space tourism, 3-D food printing, biohackers.
Which moonshot technologies excites you the most these days?
6G. We are creating so much data right now that 5G will have to be replaced much faster than people are thinking. The biggest game changer is quantum computing. By the end of this decade, the amount of calculations that we can make will be more than the atoms in the visible universe. This could be a revolution for humanity bigger than fire, bigger than the wheel.
What’s one example of how it could change our lives?
Nuclear fusion is the holy grail of energy because it generates an unlimited amount and is fully clean. We are an estimated 30 to 40 years away. The problem with nuclear fusion is the calculations around it. But quantum can leapfrog nuclear fusion.
Another example is drug development. Today, it takes on average of 15 years and tens of billions of dollars because only one out of 10,000 molecules becomes a drug. Quantum computing can do those calculations probably in a matter of minutes. I can’t even think about an industry that won’t be revolutionized.
write to Reshma Kapadia at firstname.lastname@example.org