What Does the Population Growth Bust Mean for Investors?

With fewer births to populate tomorrow's workforce, opt for health care and tech stocks, says BofA’s Quinlan.

Back in the 1970s, the big fear was a “population explosion”—an expected surge in the world’s populace that seemed to threaten to outstrip its resources, leading to wars and famines. But that dire scenario didn’t happen.

Declining fertility rates and shrinking labor forces are the trends now making the future look perilous. As Joe Quinlan, head of market strategy for Bank of America’s Chief Investment Office, warned in a note to clients, “the growth rate of any economy is dependent on population growth. The larger the population, the greater the labor force, the more capacity for consumption as workers per capita increases, and the deeper the base of taxpayers to support retirees.”

What does that mean for investors? Slower economic growth, low interest rates, and deflationary pressures.

Where does Quinlan suggest that you should channel your investments? To healthcare and technology, specifically robotics, automation, and artificial intelligence. Health stocks because an aging population will need more care, and the tech solutions, as they would take up the slack from an insufficiently large human labor force.

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These alternatives, he wrote, mirror “the new normal of global demographics.”

For a glimpse of the future, Quinlan points to Japan, whose three decades of economic stagnation dovetail with its diminishing population growth. And the same is happening in Europe, he noted.

Citing United Nations statistics, he pointed out that the populations of 55 nations are expected to lose 1% between 2019 and 2050.  Studies show that 2.1 children per woman is the number that keeps a population expanding, but the latest US rate dipped to 1.72 last year. In 2018, for the first time in history, the number of people over 65 in the world exceeded those under age 5.

As Quinlan put it, “Babies matter.”

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Strapped McClatchy Seeks Pension Bailout

Newspaper owner in talks with PBGC about distress termination of plan.

Newspaper publisher McClatchy, which owns the Miami Herald, The Kansas City Star, The Sacramento Bee, and the Charlotte Observer, among other publications, is seeking a bailout of its pension fund. The company said in a filing with the Securities and Exchange Commission (SEC) that it is in discussions with the Pension Benefit Guaranty Corporation (PBGC) for help.

McClatchy said in its most recent quarterly earnings report that for the nine months ended Sept. 29 it had a working capital deficit of $152.8 million.  It said $108.7 million of that is attributable to minimum required contributions to its qualified defined benefit pension plan due in the next 12 months.

“We face liquidity challenges relating to the minimum required contributions in fiscal year 2020 to our pension plan,” the company said in its 10Q SEC filing.

To address its liquidity needs McClatchy filed an application in June with the IRS for a waiver of the minimum required contributions for the 2019, 2020, and 2021 plan years. The IRS declined, however, to grant the three-year waiver request.

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The company continues to explore other means of pension relief, including working with members of Congress toward legislation that would mitigate the burden of the minimum required contributions.  It also consulted with the pension lifeboat PBGC to discuss measures allowed under existing regulations to provide a more permanent solution, such as a distress termination of the pension plan.

“A distress termination would allow us to continue to operate and relieve the current liquidity pressures of the minimum required contributions under Employee Retirement Income Security Act (ERISA),” McClatchy said in the SEC filing. “However, there can be no assurance that the ongoing discussions with Congress and/or the PBGC will result in any relief including a restructuring transaction, or that such relief will occur on a timely basis or at all.”

McClatchy also started discussions with its largest single debt holder to explore other alternatives with respect to its qualified pension obligations, non-qualified pension obligations, and capital structure.

The newspaper chain told pension plan participants on a website post that considerations with the debt holder include one or more de-leveraging transactions. That would include some or all the debt holders’ loans under the Junior Term Loan Credit Agreement and 6.875% senior secured junior lien notes, which are secured by second, and third liens on substantially all the company’s assets.

The McClatchy pension plan currently has more than $1.32 billion in assets, approximately $580 million of which were voluntary contributions made by the company above the legally required contribution amounts.  The plan is still underfunded, however, by approximately $535 million as of March 31. Because of that shortfall, McClatchy is required by law to make approximately $124 million of contributions during 2020, but this exceeds the company’s anticipated cash balances and cash flow.

In the third quarter, the company reported a net loss of $304.7 million, which included a non-cash charge of $295.3 million for impairment of goodwill and masthead intangible assets. Total revenues for the first nine months of the year were $526.4 million, down 11.4% from the first nine months of 2018. The hedge fund Chatham Asset Management is one of the largest shareholders and bondholders in McClatchy.

The report is a lens into the dire state of advertising in the news business. Advertising revenues were $247.4 million, down 18.1% compared to the first nine months of last year. Total digital and digital-only ad revenues surpassed print revenues for the first nine months of 2019. Digital-only ad revenues in the first nine months of 2019 were down 14.7% compared to the previous year and total digital ad revenues were down 13.6% over the same period in 2018.

In 2018, McClatchy cut about 3.5% of its staff, about 140 employees. Its current workforce of about 2,800 represents one in ten pensioners. The plan was frozen to new participants in 2009.

The company said it believes a legislative solution could provide debt relief to its business and reassurance to their participants and is “working tirelessly” with members of Congress to obtain such relief.

“Unfortunately, the bill pending before Congress—the SECURE Act—even if passed, would not provide relief for McClatchy,” the company said. “We are working hard with Congress to amend the SECURE Act to include McClatchy, and get it passed.”

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