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What Every Long-Term Investor Needs to Prepare for the ‘Population Problem’

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In 2021, India’s total fertility rate fell to 2.0.

Ever since we were young, we were always told something about our country as if it were an iron-clad fact: India is a populous country.

We were told that if India’s population was not brought under control, there would be serious economic and social problems.

And for a large part of India’s history as an independent country, this seemed to be true.

In the 1960s, India achieved self-sufficiency in food production. The government also began to focus on reducing infant mortality.

This meant that India’s population growth rate accelerated. In the late 60s and early 70s it was 2% per year. India was already quite populated then. A faster growth rate on top of a larger base means that the population will increase rapidly.

This was indeed a very serious concern and it explains the government’s obsession for decades with the idea of ​​controlling population growth.

I am sure we all remember the inverted red triangle – the symbol for the family planning program of the Government of India.

The policies attempted to ‘dissolve’ large families. TV commercials filled us with the idea that a small family is a happy family.

The dreaded term ‘population explosion’ was taught in schools to warn children of the dangers of such developments.

And in the 1970s, during the Emergency, the government went far ahead with its sterilization program.

It doesn’t matter which party is in power. The focus was always the same – to bring the population under control.

In fact, it would be safe to say that the Indian government and various state governments have made every effort to promote family planning, apart from imposing the Chinese-style one child policy on citizens.

What does the data say?

Back in November 2021, the results of the latest round of the National Family Health Survey were made public. And the results were definitely eye-opening.

The biggest take is this: There has been no population explosion in India.

The data says that India’s ‘replacement rate’ has fallen below the level required to sustain the population.

Substitution is the rate at which a population can change itself from one generation to the next.

Fertility rate is the number of children a woman has. The fertility rate of 2.1 is called the ‘replacement rate’.

In 2021, India’s total fertility rate fell to 2.0.

In fact, in most states this number is below 2. What is even more surprising is that the number in urban India is 1.6. This is similar to the fertility rate in the US.

It may be hard to believe but for families living in India’s cities, fertility is the same as in developed countries.

In urban India, couples do not have more than 2 children. Many have only one. And in increasing numbers there is none.

This means that India’s population will peak much sooner than the estimated 1.6 billion by 2060.

The population of India today is close to 1.4 billion. So the data has made it clear that population growth will be slow for the next four decades. In fact, this rate will continue to fall until it reaches zero around the year 2060.

Then the population growth rate will become negative.

That’s right. About four decades from now, India’s population will peak and begin to decline.

Remember that the replacement rate is 2.1. India’s fertility rate has already fallen below this. This means that India’s population, having reached the peak, will not be able to replace itself. It will happen.

It is not a matter of consideration. It is a mathematical certainty.

Furthermore, if this trend continues, statistics say that the population will grow to one billion by 2100.

At the turn of the century all this would have been incredible. Around that time, India’s one billionth child was born.

In 2000 no one would have believed that in 100 years, India’s population would peak and return to one billion. The thought itself would have caused laughter.

But now, we know that’s exactly what will happen.

What does this mean for investors?

Stock markets are all about the future.

Warren Buffett once famously said, ‘If past history had all that was needed to play the money game, the richest people would be librarians’.

The stock market today gives information about the future in stock prices.

It is a continuous process. It happens every day, all the time.

If investors are positive about a company’s future, its share price rises. If not, the price goes down. This is because investors buy shares to take advantage of future profits.

So if investors feel that the future will be bad or not as good as now, they will sell their shares.

This is stock market 101.

Now profit is a function of sales. The net profit of any company is simply its sales multiplied by its net profit margin.

Net profit can be increased up to a point by improving net margin. This can be done by reducing costs relative to sales. But at the end of the day, for profits to increase, sales have to increase.

Now sales are simply equal to the number of units sold (product or service) multiplied by the unit price.

If a company sells 100 units of its product at Rs 10 each, it will earn Rs 1,000 in sales. Quite simple.

The company may increase the selling price up to a point to increase sales. But he cannot do so beyond that point.

Thus, sales are directly related to the number of units sold. This means that profits are also directly related to the number of units sold.

And this means that the company’s share price is also directly related to the number of units sold.

Long term investors are very sensitive to this fact.

If they think a company is likely to short sell its products in the future, its stock will go down.

Take a look at Castrol’s long-term chart only. In the future where electric vehicles will rule the roads, how many units of engine oil will Castrol sell?

And this brings us to the all-important point of population growth.

India will not have as many people as we expected. Also, population growth will be very slow.

And it will also turn negative around 2060.

In fact, India’s population will grow old long before that point arrives.

An older population does not spend money anywhere near as fast as a younger population. This is what is happening in China right now. This will happen in the future of India as well.

Another thing to note is the change in spending pattern. As long-term investors, you should keep this in mind.

Companies will not sell as much as their managers think they will. His net profit will not be as high as he had anticipated. Their growth rate will be less than expected.

Its impact will be felt on the share prices. There are two ways to look at this change in spending patterns.

You can start by studying companies that cater to this population that is younger and older than expected.

Second, look for stocks that cater to both segments. For example, a good real estate firm will cater to young as well as aging sectors. It can develop budget homes as well as holiday homes for the two segments.

There are many other ways to follow this trend. In a follow-up section, we’ll cover those money-making ideas.

Now, this will not be a big topic in the 2020s as India’s population will remain young in the short term.

But if you are investing in stocks for your retirement fund, which is at least 15 years or more in the future…

…this is a ‘population problem’ that you should be aware of.

Be prepared for the day the stock market wakes up and give the trend its due importance. That day may not be far in the future.

(This article is syndicated from Equitymaster.com)

(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)

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