Every year, the United Nations celebrates World Population Day on July 11. This is an annual event initiated by the Executive Council of UNDP, the United Nations Development Program, in 1989 to raise awareness of the population increase in the world.
Many stories in the world press on this day refer to a variety of scenarios and challenges related to the increase in the global population, but there is a significant topic that many miss: the effect of the population increase on value investments.
Yes, population growth also has an effect on our money, and in Israel this effect isn't at all negligible.
Israel is considered a country with unique demographic characteristics, caused among other things by rapid and exponential growth in its population compared to other countries in the world.
High birthrate and immigration
This is due to a pincer movement that is affected by both a high birth rate and a mass influx of Diaspora Jews to the State of Israel.
According to data from the Organization of Developed Countries, the OECD, while the world birth average per woman in the last 15 years was 1.7, in Israel this figure stands at three children - almost double the world average.
In 2020, the rate of natural reproduction in the population of the OECD countries was estimated at only 0.4%, while in Israel it increased by 1.8% - a rate 4.5 times higher than the average. And this data obviously has a direct impact on Israel's economy.
The effect of population growth on Israel's economy
Israel's economy is directly and tangibly affected by the rapid growth in its population, for several reasons, primarily the rapid growth in the consumption of products and services in Israel.
Accordingly, for investors who focus on purchasing value stocks with a long-term perspective, it is particularly important to invest in the Israeli stock market.
As the population in Israel grows, the demands in the marketing and retail chains increase. The demand for food, fashion, technology, energy, service providers and of course apartments is increasing serially and at a pace many times faster than in leading economies in the world.
These demands translate into sales that directly affect the balance sheets of the companies that provide these products and services to the citizens of Israel.
The result is obviously felt in the profit line of these companies, which have a higher potential to earn compared to their counterparts in economies whose populations grow at a lower rate.
And what if by chance we invested in a company that was managed inefficiently and achieved a deficient return compared to its competitors? If it is an Israeli company, its yield may still be the same as its counterparts in the world.
And this is because the growth in the customer base in the world is more moderate than the growth in Israel's population. In a certain sense, this is a kind of opportunity to "beat the market" globally by choosing Israeli value investments.
And what about periods of recession? In such a case, companies that have grown at a fast pace in recent years may indeed be affected much sooner than their more stable counterparts, but they also have the highest chance of exiting the recession before that.
Because beyond the gradual return of consumer demand, the natural increase in the population also serves them.For this reason, sometimes positive growth may be considered a recession - as long as the growth is lower than the population growth rate.
The rapid rate of growth also has a negative effect on the economy, mainly on the state side, and this is due to the many challenges that the state is required to face due to the significant increase in the population. These are burdens on almost every government office in the country: transportation, infrastructure, education, health, welfare, housing, integration of sectors and more.
Credit rating is also affected
If you thought that the challenges faced by the Israeli government due to too rapid population growth, such as when apartments are built at a dramatically reduced rate compared to the rate of population growth, threaten the future of the economy, you probably haven't examined the challenges faced by governments in countries with shrinking populations.
According to a report in the Financial Times, the leading credit rating agencies Moody's, S&P and Fitch have all issued warnings that population aging is already damaging the credit ratings of governments.
The reason for this is the fear that as the proportion of old people in the population exceeds the birth rate, the fiscal burden on the state increases accordingly.
If in Israel the reports of credit rating downgrades deal with judicial reforms that may be canceled in future legislation, in rest of the world the fear of a credit rating downgrade is much more significant, as for now there is no indication of a significant expected increase in the natural growth rate of the population.
If anything, the indications are completely the opposite. This is probably the reason for the new trend characterized by the many benefits that countries in the world offer to their citizens in exchange for actions that will increase the young population in these countries. In China they even went so far and announced government funding for fertility treatments a week ago.
While five years ago the Chinese government feared a population explosion, now it fears the complete opposite. For these reasons, it seems as mentioned that value investments in Israel have a significant advantage over value investments in the world.
But alongside these advantages, as mentioned, there are also disadvantages that are characterized, among other things, by the ability of one-off events to detract from the markets adequate returns. And this is alongside the fact that this is a small country with a relatively low dispersion, compared to the largest economies in the world.
Time will tell whether even at the present time it pays to prioritize value investments in Israel over value investments in other countries.
Daniel Shabaks is the director of the financial division at Hirshovitz 360. The above should not be considered investment advice, a recommendation or an opinion regarding the feasibility of investing in financial products of any kind and type.