This piece is part of a larger whitepaper, Investing in Thematics From a PM Perspective.
Consumer trends are shifting as demographic changes alter who consumes, how they consume, and what they want to consume. New pools of consumers with growing discretionary spending power include younger generations and the middle class in emerging markets (EMs). Also, a changing regulatory backdrop may facilitate new demand and opportunities for goods and services that were previously illegal or highly restricted. We believe these demographic and regulatory shifts form the backbone of a new consumer that will shape longer-term consumption patterns and create compelling portfolio positioning opportunities.
A younger, more diverse consumer is emerging amid a massive generational wealth transfer.
Growing consumer diversity creates a complex mosaic of new wants and needs, and opportunities and risks, across the global economy. In the U.S., for example, the racial makeup of Baby Boomers is roughly 75% white, while Generation Z is only 52% white and 25% identify as Hispanic.3 Also, people are living longer while birth rates have declined. In 2020, the average age in the United States was 38, up from 27 in 1970.4 An aging population coupled with a more diverse younger population presents different spending priorities and patterns, particularly as older generations transfer their wealth.
Baby Boomers are no longer the largest U.S. generation, yet they continue to hold more wealth than any other. Baby Boomers’ share of wealth peaked at 55.9% in Q3 2016 before declining to 52.1% in Q3 2022.5 In 2022, research and consulting firm Cerulli Associates forecast wealth transfers through 2045 to total roughly $84.4 trillion, with about $72.6 trillion of that total going to heirs. Cerulli expects the majority of this wealth transfer to come from Baby Boomers.6 Cerulli estimates that Generation X, ages 40 to 55, will inherit nearly $30 trillion over the next 25 years, while Millennials, ages 24 to 39, will inherit over $27 trillion.7
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China’s aging population could dampen consumption.
Although China softened its one-child policy in 2016, the country’s fertility rate remains well below the replacement rate.31 An aging population adds pressure on younger generations, given that they are usually the ones to take care of the elderly. When generations expand sequentially, this issue is not as acute. However, China’s one-child policy created an inverted pyramid known as “4-2-1,” or four grandparents and two parents dependent on one child.
In the next 10 years, 123.9 million more people will age into the 55 and above segment in China, the largest demographic increase among all ages.32 More people will be needed to care for the elderly, and demand for retirement communities and other infrastructure tailored to an older population will increase. Care for the elderly may require more savings from a nation that historically saves more than other countries, potentially dampening future consumption.
Increased focus on sustainability could change consumption patterns.
A growing majority of consumers have an interest in sustainable products, and they increasingly ask companies how they incorporate sustainable practices in their business models. In a recent survey, 85% of respondents indicated that they have shifted their purchase behavior towards being more sustainable in the past five years.37 About 40% of millennials will choose a sustainable alternative when available, whereas older generations are slightly less likely (26-31%). Overall, European consumers report major shifts in their purchasing decisions towards sustainability, notably in Austria (42%) and Italy (41%), more so than U.S. consumers (22%).
The increased desire for sustainable products may shift consumption to longer-lasting items that don’t need to be replaced as frequently, which is already the case with goods such as paper towels and recycled clothing.38 Growing interest in sustainability could stifle demand for many “dirtier” legacy industries while increasing the demand for those perceived as “cleaner.”
Mobility
Younger generations’ desire for sustainability cuts across many facets of their life, including how they get around. As these generations come into wealth over the coming years, this desire will likely accelerate the adoption of electric vehicles (EVs).
A recent survey revealed that seven out of 10 U.S. drivers would be interested in buying an EV when charging infrastructure expands and EV costs drop.39 To meet this demand, one estimate says automakers and suppliers need to invest at least $526 billion in EVs and batteries between 2022 and 2026, more than double the five-year EV investment forecast of $234 billion for 2020–2024.40 To achieve the International Energy Agency’s (IEA) net zero emissions by 2050 goal, global EV sales would likely need to increase to 60% of total car sales by 2030.41
Fintech
The intersection of financial services and technology, or fintech, is where many people now go to spend, lend, borrow, invest, and trade. Fintech makes financial services more personal and inclusive. Over the last two years, fintech adoption has increased dramatically around the world, with smartphone access and usage a primary driver.
Demographic divergence across different fintech applications is vast, but adoption among younger generations is much more prevalent. They are highly comfortable using technology for financial transactions, including using mobile payment apps for peer-to-peer (P2P) payments. Seventy-two percent of mobile payments users are Millennials or Gen X.42 For older generations, concern about loss of funds is the biggest obstacle to adoption. As trust grows across generations, we expect digital payments markets to accelerate.
Consumers are the engine for economic growth across the globe. Understanding generational preferences and dynamics will be essential to drive corporate growth. We expect the Millennial Consumer theme to become increasingly prominent in investment portfolios. On the adoption curve, both the Millennial Consumer and E-commerce themes land squarely in the early majority phase, indicating that adoption levels are high and rising.
The pie chart breaks down the geographic exposure of the largest Millennial and E-commerce thematic ETF products. We believe that there is ample innovation occurring outside the U.S., and that limiting exposure to the States will exclude key players to the detriment of investors over the long term.
In our view, thematic equity should be targeted using screens to ensure that the underlying companies provide the desired exposure. This pure play focus minimizes overlap between themes while also differentiating the exposure provided by the theme relative to broad beta products. We conducted an overlap analysis between Millennial and E-commerce ETFs, the S&P 500, MSCI All Country World Index (ACWI), and the most applicable S&P 500 sector ETFs: the Consumer Discretionary Select Sector SPDR Fund (XLY) and the Technology Select Sector SPDR Fund (XLK). We found that the average overlap by weight for the Millennial and E-commerce themes was 7.5% when compared to the S&P 500, 5.7% vs. the MSCI ACWI, 15.14% vs. XLY, and 3.5% vs. XLK.43 The low overlap with broad indexes reflects the benefits of thematic exposure, as sector indexes have yet to include substantial exposures towards these targeted consumer themes.
New Consumer reflects the rapidly changing consumption landscape in the U.S. and around the world. As the Baby Boomer generation continues to retire and transfer wealth to younger generations, we expect shifts in consumer behavior and preferences. In EMs, the growing middle classes in China and India create access to a new consumer that is gaining purchasing power and becoming more interested in quality goods and services. In our view, it is essential for companies to anticipate and adapt to these shifts to be better positioned to build long-term relationships with consumers and shareholders.
The graphic below identifies the largest U.S. listed ETFs that provide direct exposure to the New Consumer theme.
Read the next section of the Thematic Investing Whitepaper on the Healthcare Innovation theme.