by Chris Becker
How can Gen X/Y investors take advantage of the Baby Boomer demographic shift? That is, apart from funding their retirements by buying their overpriced houses or paying rent in their investment properties?
What about picking up stocks that are likely to benefit from a changing spending dynamic?
Bank of America-Merrill Lynch (BOML) has an interesting report out recently on just this subject and whilst the individual picks give me some reservations, the underlying themes do make sense:
- discretionary consumers (e.g. travel)
- healthcare
- financials/insurance
As retirement beckons, some spending habits will change – others will not. Discretionary spending is likely to remain flat (especially for those without significant super, read: most baby boomers), or depending on the level of sentiment (usually cause by asset price inflation), even rise. Tourism is the obvious one, whilst increased spending on caravans and 4WDs is another (on a recent holiday to Cairns I was gobsmacked at the $250K rigs driven by Baby Boomers that seemed to be everywhere!)
Mind you the performance of caravan parts supplier Fleetwood (FWD) has left a lot to be desired – one of the first casualties of the mining capex bust:
BOML also picks out Flight Centre (FLT) as one to benefit in the long run, particularly on package deals (cruises etc…yuck) There is a good opportunity here as FLT has signalled some short term weakness (along the lines of the other whinging retailers due to weather, Budget, Godzilla etc) and the share price is rolling over after a sterling rise:
The largest dynamic is of course health as BOML strategist Sarbjit Nabal points out:
Pharmaceuticals and healthcare companies with involvement in areas such as Alzheimer’s, dementia, cancer and cardiovascular disease are well placed to benefit from longevity.
Obvious picks rise to the top for BOML: Primary Health Care (PRY) and Ramsay Health Care (RHC), the two major private hospital managers, more speculative plays in pharmaceuticals like Mesoblast (MSB) and Cochlear (COH) – a perennial favourite of mine, but sadly off the rails (although a swing long is developing – hmm).
Here are some recent share price performances:
The risks in investing in healthcare stocks are many. First, there’s patent and regulatory risk from bureaucratic changes (or failed lobbying, pick your poison), followed by budgetary risk – a big shift in healthcare spending could see public systems overloaded, the consequences of which cannot be understood with any foresight and finally “flight risk” – i.e medical tourism.
What else to look at? BOML goes on to suggest some non-core financial stocks (i.e not a bank) including Challenger (CGF) and AMP. While I can understand the interest in CGF – which has made some significant innovations in the superannuation sector, finally offering some non-speculative investment options, a corner of the market it can exploit for sometime – the stock is extremely overvalued, having doubled in the last year.
Maybe one to put on the “buy list” after a correction:
AMP is a strange choice, not one I’d touch for long term share price appreciation (its currently still at a 10 year low), given the size and staidness/conservative nature of its operations. Yield is available, but there are much better financials out there to choose from for a capital appreciation point of view (e.g. debt servicing companies). Not many, given the crowding out by the big four oligolopy.
I also have some reservation in the underlying theme, although that is moot, as the Gen X cohort is as big as the Baby Boomers and they will be demanding more financial services as they approach middle age/middle earnings.
In fact, I’d be looking more closely at debt servicing companies that can take advantage (sic) of an extremely over-indebted cohort coming up behind the Baby Boomers in the next 20 years and/or any mortgage financing companies that will have their claws onto reverse mortgage deals for asset rich, cash poor Boomers.