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February Newsletter: ‘The end of the trend’

22 February 2023

If there is a measure of success of economic development surely it is life expectancy? Since the discovery of penicillin, life expectancy has been on a steep upward trajectory. The unprecedented belief that science drives progress has continued that trend. Drugs for many ailments have come to the market – indeed saved lives. Investors have profited from investing in the successful pharmaceutical companies who keep us all alive. Surely if there has ever been a win-win scenario it’s life expectancy?

However, something has changed. Normally we do cartoons for our newsletter, but the graph shown is no laughing matter. US life expectancy is sharply reversing. Indeed, it is now below that of China. If life expectancy is a measure of progress where does that now leave America?

Explanations for the sharp reversal are varied. Covid takes centre stage. But increases from drug overdoses, heart disease and liver problems point to the impact of the modern lifestyle. It’s likely the consumption excess of the last 50 years is only just beginning to be felt on those born post 1950’s. The generation in their 70’s and 80’s now was the last to have widespread limitations on what they consumed. Both as children and young adults. That restraint has been positive for their life expectancy.

So, what does all this mean – with US life expectancy at birth at its lowest level since 1996 and other western countries following the trend?

For investments it means adjustments. Making investment profits on such a change seems somewhat grim. However, there are some prime beneficiaries. Most notable insurance companies that run annuity schemes. An annuity is a financial product that offer a series of payments, often monthly, for the rest of your life in exchange for an initial lump sum. When you get to retirement age you will almost certainly be offered an annuity as an option on how to take your pension. In the UK if you were to retire today and pass a lump sum of £100,000 to an annuity provider you would get about £6,000 p.a. In other words, you would have to live until you were over 81 just to get your money back. This seems a meagre pay-out. But the insurance companies are premising their pay-outs on ever increasing life expectancy. Unexpected drops in life expectancy are windfall profits to these guys. For pharmaceutical companies, the tailwind of increasing life expectancy has turned into a headwind. Less of us living to our 80’s means fewer hip operations, less pill popping.

‘One swallow, of course, doesn’t make a summer.’ Especially for scientists who pride themselves on waiting for complete proof before deciding on things. Hence, perceived wisdom is that life expectancy will still continue to increase. But investors should always pay attention to the first swallow. Making informed choices before the arrival of the flock is important. If you are a client, expect some beneficiaries of this change in trend to be in your portfolio soon.