October 2, 2024 • 27 mins
The world's population is likely to peak in the next 60 years and nowhere is this trend felt more than Asia, with countries such as South Korea and Japan registering some of the lowest birth rates and oldest populations.
Wei Li, Global Chief Investment Strategist at BlackRock, discusses the role demographics plays in investing and why it may be the most important megatrend. She joins John Lee of Bloomberg Intelligence and Katia Dmitrieva of Bloomberg News on the Asia Centric podcast.
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Speaker 1 (00:02):
You're listening to Asia Centric from Bloomberg Intelligence, the podcast
that pulls back the curtain on global business so you
can invest better across the Asia Pacific room. I'm John
Lee in Hong Kong, and.
Speaker 2 (00:14):
I'm Katadmitriyeva, also in Hong Kong. Today we're talking about
demographics and aging. The world's population is likely to peak
in the next sixty years according to the United Nations,
and depending on where you're listening from, your country may
already be shrinking. One in four people live in a
place where numbers are already on the decline. Nowhere is
(00:37):
this trend that felt more than Asia, where countries like
South Korea and Japan consistently register the lowest birth rates.
It'll have major impacts on the size of labor markets,
economic growth, and the way we live.
Speaker 1 (00:52):
But it's not all gloom and doom though. People are
living longer and generally healthier lives, and as populations shrink,
there could be some opportunities for businesses and investors. Some countries,
especially those in emerging markets, are bugging the trend for
now with relatively young populations. There's also some trends that
investors may be interested in, like the rise of automation
(01:15):
and robotics.
Speaker 2 (01:16):
Our guest this week says demographics is one of a
handful of mega trends set to shape the future of investing.
Joining us is Way, lead Global Chief investment strategist at Blackrock,
the world's largest asset manager. Welcome Way.
Speaker 3 (01:31):
Thank you so much, Katia and John for having me Wall.
Speaker 2 (01:36):
It's a pretty existential topic we're talking about today. How
often in your job do you have to think about
aging and demographics day today?
Speaker 3 (01:46):
I think more and more. In the past, the focus
was very much around the cyclical ads and the flows
of the economy, but we are at this really unique
juncture where we have the intersection between the cyclical ads
and the flows, pandemic unwind and also structural forces mega
(02:11):
forces that you just alluded to. Demographics is one of them,
The low carbon transition is another one, Geopolitical fragmentation is
another one, and then more broadly, thinking about the future
of finance, thinking about the role banks play and private
credit play is another trend that we're paying attention to.
(02:32):
And of course AI this the five mega forces that
black Rock has identified that we think have been and
will impact the economy and markets more and more.
Speaker 2 (02:45):
So, tell me about the demographics component, because traditionally we
think about demographics impacting the economy and finance as sort
of the labor market trinks, the economy slows. Is that
the only way we should be thinking of it.
Speaker 3 (03:00):
I think you're right, Caasia that the shrinking labor force
is a main channel, because all else equal, when we're
looking at a shrinking workforce, it means that an economy
cannot grow as fast as before. If you look at
the G seven in the last twenty years or so, right,
(03:21):
so you look at how much of its growth was
actually accounted for by growth in labor force. So the
growth in labor force accounted for about zero point three
percent of the one point seven percent average growth rate
according to OECD. And that boost is not only disappearing
(03:41):
but also reversing, so unless worker productivity rises more rapidly,
actually we estimate the average economic growth for this group
was slow to one point two percent. So you're absolutely right,
the shrinking workforce is the main channel. But there are
the channels that also affect the economy and markets as well,
(04:03):
including aging populations, effect inflation. And we think that many
of the implication of aging for inflation and policy rates
are currently under appreciated. So we differ a little bit
from the consensus in that we think aging is inflationary
because it creates worker shortage and reduces supply capacity by
(04:29):
more than it reduces demount because retires stop producing economic output,
but they do not typically spend less, so that's another
important channel. And then we also look at pension and
healthcare spending, putting further pressure on government budget as another
piece of consideration as well, So there are multiple channels
(04:51):
the aging place in that then affect the economy and markets.
Speaker 1 (04:58):
Atia Centric is produced by Bloomberg Intelligence, where more than
five hundred experienced analysts and strategists work around the clock
to bring you timely, world class research. Our coverage spans
two hundred market industries, currencies, commodities and industries, as well
as over two thousand equities and credits. If you like
(05:19):
what you hear, don't forget to subscribe and chirm. Wait
how does demographics and the aging population impact market returns?
Speaker 3 (05:28):
Now?
Speaker 1 (05:28):
For example, investors often cite India its young population, its
growing population, and its demographic dividend as a reason to
buy Indian stocks, but there's also a lot of emerging
markets with a growing population that haven't done so well.
Can you explain how does this impact investments?
Speaker 3 (05:48):
Yes, it does impact investment, and all else equal, having
a growing population potentially greater productivity certainly boats, while boats
better for overall economic outlook and potentially investment. But for
emerging markets, the outlook also depends on how while they
(06:10):
capitalize on their demographic advantage. Here we're talking about improving
workforce participation, investing in infrastructure. Otherwise, if you just have
population growth without the supportive kind of measures put in
place to capitalize that, the higher population could result in
(06:32):
higher unemployment rate. So country with higher demand for investment
like India, Indonesia, Mexico, and Saudi Arabia could offer higher return.
But it's a big kind of contingency here is that
they really put in policies to capitalize on their demographic advantage.
And equally, lower growth is not necessarily inevitable for aging economies.
(06:58):
It also depends on how well they are adapt to
age in population, whether these economies find ways to offset
the fall in the working age population. So, for example,
governments can try to boost a shrinking workforce by attracting
workers from other countries increasing the share of women and
other underrepresented groups in the labor force, or raising productivity
(07:21):
by investing in automation and AI, which we have seen
in Korea, Japan and also other parts of developed economies
as well.
Speaker 2 (07:32):
You mentioned Korea and Japan, Are they perhaps examples of
countries that are doing it right where the governments have
identified that, you know, the demographics shift is very real.
People are getting older, the fertility rate is dropping. Do
you see those as kind of prime examples of countries
getting it right in terms of adjusting to the new reality.
Speaker 3 (07:54):
I think so. They definitely have presented a playbook in
terms of how aging economies can help offset the aging
economy and productivity fall by other measures. Right, so, Career
and Japan have aggressively embraced the robotics as a solution
to their declining workforce. Career in particular, positioning itself as
(08:17):
a global leader in industrial automation heavily investing in AI
driven and service robotics, and Japan similarly as well, focuses
on automation, especially in elder care and advanced manufacturing technologies,
very much capitalizing on its technological leading position. Career Japan
(08:39):
is a good example, but other examples can be found
outside of Asia. You look at Germany, for example, very
much stands out as a leader in robotic adoption. In
Europe really very much known for its advanced manufacturing capabilities
and high levels of automation in the industrial sectors. Are
(09:00):
good examples that can be found across the world. But
Korea Japan are very much standing out in Asia.
Speaker 1 (09:07):
Well, if we could just talk about Korea, in Japan
and in particular South Korea, in terms of the fertility rates,
it's absolutely off the scale. I think it's the worst.
Korea right now is just having zero point seven children
per woman. That's probably the worst in the world. I
know Japan's not that far behind. Why do you think
(09:28):
the fertility issue is the biggest in these East Asian countries.
Speaker 3 (09:33):
It's hard to opine on reasons for low birth rate,
but I would observe that this is not a unique
issue for Korea and Japan, because falling birth rates can
be observed in the rest of the world as well.
In fact, globally, the dependency racial which is a measure
(09:55):
of population aging, it was rapidly decreased in prior to
twenty twenty and now that is no longer the case,
so population agent is more pronounced going forward as projection
by United Nations.
Speaker 2 (10:11):
Yeah, and basically dependency ratio, as you said, it basically
means that we're seeing more old people to young people essentially.
Speaker 3 (10:20):
That's right, that's right. It was declining globally before and
now that is increasing as per projection of the United Nations.
So what you just described is not a unique phenomenon
in South Korea, and in fact has actually demonstrated how
despite aging population, by relying on other measures, the economy
(10:42):
can help offset some of the headwinds from aging population.
Speaker 1 (10:48):
Earlier this year, there was quite an amusing development. Japan's
og Holdings announced that they're going to stop making diapers
for babies and instead focus on viapers for adults. It's
a music on a number of fronts. I didn't know
there was diapers for adults. But you mentioned some industries
that benefit, and also you know from this trend of
(11:10):
an aging population, obviously this example is a company that
is negatively impacted. Can you elaborate more what type of
industries would be impacted by an aging population?
Speaker 3 (11:23):
Yes, Actually that is a great question because Japan stands
out for many reasons. So similar to career, Japan is
heavily affected by aging. It has a very high participation
rate among over sixty fives, and female participation rate has
been rising rapidly. So that's another example of how aging
(11:46):
population adaptation measures can be put in place to offset
the trend of demographics. And what we have seen is
that sectors like healthcare, sectors like elderly home elder care
that very much cater to age in population are while
positioned to benefit, but it may not happen straight away.
(12:10):
So this is a question that we get a lot,
which is that demographic trend is the most predictable trend.
It's written in the shape of the population for years
and years and years. How do we position for that,
because it must have been so clear for everyone to
position for that, because it's inevitable, this is the direction
of travel. What we have seen is the relative performance
(12:34):
of healthcare as a sector over the broader appley market.
That relative performance actually closely closely mirror the dependency ratio
in Japanese economy, which means that even though this is
something that was very predictable from years ago, the performance
doesn't come through until the economic data actually clearly supports
(12:58):
the population aging. So investment opportunities can still be found
by positioning for those trends now. Because our study shows
that it takes time for the relative performance to come through.
It takes time for markets to adjust for the relative trend,
(13:22):
and it doesn't happen straight away. And I think that
is because markets are oftentimes only capable of focusing on
one thing and it doesn't have that as much long
termism in terms of how ahead it looks. That means
that even something as slow moving and as predictable as
demographic trends can still produce investment opportunities for us to capitalize.
Speaker 2 (13:48):
So how do you sort of price it in or
position for it now? Because as you said, these are
very long term trends, demographics aging, long term trend Are
there ways that investors today can sort of make a
bet on certain economies or certain markets or certain companies
And if so, what would those be? How would you
(14:09):
advise an investor today on that?
Speaker 3 (14:12):
Absolutely, so there are three ways to think about it.
So over the long term, sectors like healthcare, like infrastructure
can really benefit from the greater demand as populations age,
which is something that we can position for even right now,
even though it is predictable, because as I said, markets
can be quite slow in price in the impact of
(14:36):
this predictable trend. So this is one way and not ways.
Is do you look at countries with higher demand for investment.
You talked about India, There are other countries likely in
emerging economies, emerging markets with greater population growth that are
likely to offer investors higher returns. So here we're talking
(14:57):
about greater investment opportunities in productive capital like machinery, transport, infrastructure, housing, schools,
and hospitals. And here again countries in Asia like India
Indonesia standout. They have had very high investment rates historically
and that is even adjusted for population growth because they
(15:21):
urganized very very quickly. Right our study of the demographics
implies that this is still likely going to be true
in the coming years and decades. So that's another way
of looking at that. And then on a shorterm basis,
there are trends that are impacting markets that may not
be here to stay and that requires immediate kind of
(15:45):
attention and positioning portfolios for So a case in point
is if you look at the larger than expected rise
in immigration in the US. Right, So I give you
an example. In January, the CBO revised it's immigration number
for twenty twenty four to three point three million, which
is a record breaking level and up from around one
(16:07):
million expected the year before. And what that has down
to the US economy, which is the biggest economy, the
biggest market globally, is that that has unexpectedly boosted payrolls
this year and helped service inflation to cool down at
least temporarily. So for coming out of the pandemic and
(16:30):
throughout the course of the pandemic, sticking inflation has been
a main consideration for the FAT in terms of how
quickly it can cut rate. So the fact that the
immigration boost, that the larger than expected immigration, the positive
supply shop to the US labor force, meant that service
inflation was cooling down faster than expected, at least temporarily.
(16:52):
And at the same time you look at the growth picture,
it's actually somewhat resilient, right. And I think this micro
backdrop much helped the US economy US equity market performance. Yes,
a lot of that earlier on in the year has
been concentrated in the AI theme, but now it's very
much supported by growth is holding up okay, and inflation
(17:15):
is dropping very much thanks to the positive supply shock
of the immigration front. And this is not something that's
just happening in the US, right. Immigration has also been
increasing in Europe as well, but this is less talked about.
So these are the near term ways that investors can
(17:36):
look at to capitalize changing trends usin populations.
Speaker 1 (17:41):
That's quite an interesting view because immigration is often blamed
for increasing housing prices rent in these countries, but it's
obviously had a you know, a positive impact on inflation.
I wanted to talk about China. Now, China is also
having a big problem in terms of an aging population.
(18:01):
How does that impact your views on China and what
could happen if China, like, you know, possibly follows down
the root of you know, careers fertility rate.
Speaker 3 (18:12):
Yeah, so China is no longer the most populated country
in the world, and this is a challenge for long
term growth. Right. So there is kind of cyclically what's
happening to the Chinese economy, and the central authorities are
trying to support the economy, but maybe the measures are
so far piecemeal and not big enough, not the big
(18:33):
boluka that markets sometimes are hoping for, which also explains
why Chinese accrea market is the one major apple market
that is done since the pandemic rather than so cyclically.
There are challenges, but over the long term, declining population
is a big reason, together with the needful reform, why
(18:55):
we believe Chinese economy is slowing down. Right, So by
the end of the decade, we are expecting Chinese economy
to have a three handle in terms of annual growth,
which puts it not much faster in terms of growth
rate than many developed economies. So all of that just
to say, aging population, aging demographics is a structural headwing
(19:20):
for Chinese growth or else equal. But as I said earlier,
how the countries, how China adapt to this by incorporating
AI industrial robotics and also kind of on the immigration front,
could potentially help offset some of that.
Speaker 2 (19:41):
So I wanted to come back to that idea that
an aging population can actually be inflationary because a few
examples we have recently show that the opposite might be true.
You know, you have this last period in Japan China
as well as running into deflation issues right now, isn't
(20:02):
a period of deflation and has some challenges in demographics
and aging. So why does black Rock see that this
demographics issue could actually be inflationary to economies.
Speaker 3 (20:14):
This is a great question, Katina, And our view, as
I said earlier, is that it's a somewhat non consensus view, right.
We say that we disagree with consensus in believing that
aging population would be inflationary, and a lot of the
consensus was very much driven exactly by the last decades
in Japan. It was a period when Japan was aging,
(20:37):
and it was also clearly a period of deflation. But
I would say that our conviction was very much framed
around or else equal, this is what we expect to happen.
But in the case of Japan, there were other episodes,
other factors playing out that led to this period of
(20:58):
both aging and deflation. So first, we had the late
nineteen eighties asset price bubble, talking about the stock and
housing market bubble that led to the subsequent last decade
and the banking crisis, and these crisis clearly were deflationary
and played a more dominant role than the population demographic trend.
(21:22):
And second, if you look at the broader global picture
when Japan was aging, so Japan was aging when the
rest of the world was not. So Japan's workforce was
shrinking at a time when labor was abundant elsewhere in Asia,
and China was integrating in the global labor market. Like
(21:43):
China was growing, the population was younger, it was joining wto.
So the global dynamics has meant that if Japan's companies
invested heavily abroad, and they did, they were able to
reduce production costs and they did not. Fast forward to
where we are now twenty twenty five, we're in a
(22:04):
fundamentally different environment. You know, we talked about other mega
forces also playing a big role, and they are interacting
with each other. Geopolitical fragmentation is another mega force, and
geopolitical tension has meant that globalization is stalling, is getting rewired.
And additionally, many developed economies and some emerging markets China
(22:29):
included aging at the same time, so globally, as I
was citing this figure, the dependency racial previously was rapidly
decreasing prior to right before the pandemic, and now it
is no longer the case in facts moving in the
other direction. So the global dynamics, the global context is
(22:50):
no longer helping. So in a way, Japan was aging,
but supported by the broader picture that aging economies now
can no longer depend on as a japandee back.
Speaker 2 (23:02):
Then do you find that more investors and maybe even
more of your colleagues are asking about this topic more?
Speaker 3 (23:12):
I tell you one anecdote, and the short answer to
this is yes, but it's a funny anecdote. So I
hosted the Internal Investor Summit twice a year, and every
time we talk about what was important for the economy
and for markets. The last Internal Investor Summit that I hosted,
(23:32):
I framed it around mega forces. I framed it around
the five mega forces that we just talked about, and
I asked investors to kind of give their preference in
terms of which one they want to deep dive into
in breakout sessions, so AI had the most interest and
(23:53):
aging population had the least people joining during the breakout.
But when we then bring everyone to get back on
stage to debate how much more is in the price
where the delta opportunities are actually the aging population mega
force presented disconnect and opportunities in a way that is
(24:16):
more surprising that there is more surprising than the other
mega forces. So the some bite that I took away
from this Internet investor summits that I alsto is the
investors were telling me it's the most boring and predictable trend,
and yet it is the most important trend to get right,
given how much disconnect there is between the attention paid
(24:38):
to it and the opportunities that it represents. So yes,
more and more focused on this trend.
Speaker 2 (24:44):
So who knew aging could be sexier than AI?
Speaker 3 (24:48):
They're both sexy.
Speaker 2 (24:50):
Well, we've covered a lot of themes and ideas here.
Is there anything else that you wanted to talk about?
Speaker 3 (24:58):
Nothing new other than to reiterate the importance of paying
more attention to structural forces at this point compared to before.
Right now, cyclical data are very noisy, and especially given
(25:19):
the distortion coming out of the pandemic as some of
the mismatch on wines, it's very noisy. And if we
don't have a proper anchor for how economy is playing
out and what markets should be focused on, then we
could really make the risk of extrapolating too much a
couple of data points and swing wildly in terms of
(25:42):
the narrative. Right like you saw at the beginning of
the year, the heart landing narrative and then soft landing narrative,
and the no landing narrative and a heart landing narrative again.
You see how just paying attention to cyclical adds and
the flows can be very unnecessarily volatile and confused. And
whereas a lot of this can be explained when we
(26:03):
put on that structural head, when we view what's happening
through the structural lens. So all of that just to say,
mega forces and structural forces are going to matter more
and more, and the effect and the interplay of these
mega forces are likely going to amplify its impact on
the macro environment. So the time is now to be
(26:23):
paying attention to aging population. The time is now to
be paying attention to the low carbon transition in terms
of the broader impact.
Speaker 1 (26:32):
Fantastic, It's been a fascinating discussion on demographics, Asia's aging
population and how this impacts investment decisions. Thank you way
for joining the show.
Speaker 3 (26:44):
Thank you so much for having me. I really enjoyed
our conversation.
Speaker 2 (26:48):
I'm John Lee in Hong Kong and I'm Katidmitrieva, also
in Hong Kong.
Speaker 1 (26:53):
This episode was produced by Clara Chen and you've been
listening to the Asia Centric podcast
You're listening to Asia Centric from Bloomberg Intelligence, the podcast
that pulls back the curtain on global business so you
can invest better across the Asia Pacific room. I'm John
Lee in Hong Kong, and.
Speaker 2 (00:14):
I'm Katadmitriyeva, also in Hong Kong. Today we're talking about
demographics and aging. The world's population is likely to peak
in the next sixty years according to the United Nations,
and depending on where you're listening from, your country may
already be shrinking. One in four people live in a
place where numbers are already on the decline. Nowhere is
(00:37):
this trend that felt more than Asia, where countries like
South Korea and Japan consistently register the lowest birth rates.
It'll have major impacts on the size of labor markets,
economic growth, and the way we live.
Speaker 1 (00:52):
But it's not all gloom and doom though. People are
living longer and generally healthier lives, and as populations shrink,
there could be some opportunities for businesses and investors. Some countries,
especially those in emerging markets, are bugging the trend for
now with relatively young populations. There's also some trends that
investors may be interested in, like the rise of automation
(01:15):
and robotics.
Speaker 2 (01:16):
Our guest this week says demographics is one of a
handful of mega trends set to shape the future of investing.
Joining us is Way, lead Global Chief investment strategist at Blackrock,
the world's largest asset manager. Welcome Way.
Speaker 3 (01:31):
Thank you so much, Katia and John for having me Wall.
Speaker 2 (01:36):
It's a pretty existential topic we're talking about today. How
often in your job do you have to think about
aging and demographics day today?
Speaker 3 (01:46):
I think more and more. In the past, the focus
was very much around the cyclical ads and the flows
of the economy, but we are at this really unique
juncture where we have the intersection between the cyclical ads
and the flows, pandemic unwind and also structural forces mega
(02:11):
forces that you just alluded to. Demographics is one of them,
The low carbon transition is another one, Geopolitical fragmentation is
another one, and then more broadly, thinking about the future
of finance, thinking about the role banks play and private
credit play is another trend that we're paying attention to.
(02:32):
And of course AI this the five mega forces that
black Rock has identified that we think have been and
will impact the economy and markets more and more.
Speaker 2 (02:45):
So, tell me about the demographics component, because traditionally we
think about demographics impacting the economy and finance as sort
of the labor market trinks, the economy slows. Is that
the only way we should be thinking of it.
Speaker 3 (03:00):
I think you're right, Caasia that the shrinking labor force
is a main channel, because all else equal, when we're
looking at a shrinking workforce, it means that an economy
cannot grow as fast as before. If you look at
the G seven in the last twenty years or so, right,
(03:21):
so you look at how much of its growth was
actually accounted for by growth in labor force. So the
growth in labor force accounted for about zero point three
percent of the one point seven percent average growth rate
according to OECD. And that boost is not only disappearing
(03:41):
but also reversing, so unless worker productivity rises more rapidly,
actually we estimate the average economic growth for this group
was slow to one point two percent. So you're absolutely right,
the shrinking workforce is the main channel. But there are
the channels that also affect the economy and markets as well,
(04:03):
including aging populations, effect inflation. And we think that many
of the implication of aging for inflation and policy rates
are currently under appreciated. So we differ a little bit
from the consensus in that we think aging is inflationary
because it creates worker shortage and reduces supply capacity by
(04:29):
more than it reduces demount because retires stop producing economic output,
but they do not typically spend less, so that's another
important channel. And then we also look at pension and
healthcare spending, putting further pressure on government budget as another
piece of consideration as well, So there are multiple channels
(04:51):
the aging place in that then affect the economy and markets.
Speaker 1 (04:58):
Atia Centric is produced by Bloomberg Intelligence, where more than
five hundred experienced analysts and strategists work around the clock
to bring you timely, world class research. Our coverage spans
two hundred market industries, currencies, commodities and industries, as well
as over two thousand equities and credits. If you like
(05:19):
what you hear, don't forget to subscribe and chirm. Wait
how does demographics and the aging population impact market returns?
Speaker 3 (05:28):
Now?
Speaker 1 (05:28):
For example, investors often cite India its young population, its
growing population, and its demographic dividend as a reason to
buy Indian stocks, but there's also a lot of emerging
markets with a growing population that haven't done so well.
Can you explain how does this impact investments?
Speaker 3 (05:48):
Yes, it does impact investment, and all else equal, having
a growing population potentially greater productivity certainly boats, while boats
better for overall economic outlook and potentially investment. But for
emerging markets, the outlook also depends on how while they
(06:10):
capitalize on their demographic advantage. Here we're talking about improving
workforce participation, investing in infrastructure. Otherwise, if you just have
population growth without the supportive kind of measures put in
place to capitalize that, the higher population could result in
(06:32):
higher unemployment rate. So country with higher demand for investment
like India, Indonesia, Mexico, and Saudi Arabia could offer higher return.
But it's a big kind of contingency here is that
they really put in policies to capitalize on their demographic advantage.
And equally, lower growth is not necessarily inevitable for aging economies.
(06:58):
It also depends on how well they are adapt to
age in population, whether these economies find ways to offset
the fall in the working age population. So, for example,
governments can try to boost a shrinking workforce by attracting
workers from other countries increasing the share of women and
other underrepresented groups in the labor force, or raising productivity
(07:21):
by investing in automation and AI, which we have seen
in Korea, Japan and also other parts of developed economies
as well.
Speaker 2 (07:32):
You mentioned Korea and Japan, Are they perhaps examples of
countries that are doing it right where the governments have
identified that, you know, the demographics shift is very real.
People are getting older, the fertility rate is dropping. Do
you see those as kind of prime examples of countries
getting it right in terms of adjusting to the new reality.
Speaker 3 (07:54):
I think so. They definitely have presented a playbook in
terms of how aging economies can help offset the aging
economy and productivity fall by other measures. Right, so, Career
and Japan have aggressively embraced the robotics as a solution
to their declining workforce. Career in particular, positioning itself as
(08:17):
a global leader in industrial automation heavily investing in AI
driven and service robotics, and Japan similarly as well, focuses
on automation, especially in elder care and advanced manufacturing technologies,
very much capitalizing on its technological leading position. Career Japan
(08:39):
is a good example, but other examples can be found
outside of Asia. You look at Germany, for example, very
much stands out as a leader in robotic adoption. In
Europe really very much known for its advanced manufacturing capabilities
and high levels of automation in the industrial sectors. Are
(09:00):
good examples that can be found across the world. But
Korea Japan are very much standing out in Asia.
Speaker 1 (09:07):
Well, if we could just talk about Korea, in Japan
and in particular South Korea, in terms of the fertility rates,
it's absolutely off the scale. I think it's the worst.
Korea right now is just having zero point seven children
per woman. That's probably the worst in the world. I
know Japan's not that far behind. Why do you think
(09:28):
the fertility issue is the biggest in these East Asian countries.
Speaker 3 (09:33):
It's hard to opine on reasons for low birth rate,
but I would observe that this is not a unique
issue for Korea and Japan, because falling birth rates can
be observed in the rest of the world as well.
In fact, globally, the dependency racial which is a measure
(09:55):
of population aging, it was rapidly decreased in prior to
twenty twenty and now that is no longer the case,
so population agent is more pronounced going forward as projection
by United Nations.
Speaker 2 (10:11):
Yeah, and basically dependency ratio, as you said, it basically
means that we're seeing more old people to young people essentially.
Speaker 3 (10:20):
That's right, that's right. It was declining globally before and
now that is increasing as per projection of the United Nations.
So what you just described is not a unique phenomenon
in South Korea, and in fact has actually demonstrated how
despite aging population, by relying on other measures, the economy
(10:42):
can help offset some of the headwinds from aging population.
Speaker 1 (10:48):
Earlier this year, there was quite an amusing development. Japan's
og Holdings announced that they're going to stop making diapers
for babies and instead focus on viapers for adults. It's
a music on a number of fronts. I didn't know
there was diapers for adults. But you mentioned some industries
that benefit, and also you know from this trend of
(11:10):
an aging population, obviously this example is a company that
is negatively impacted. Can you elaborate more what type of
industries would be impacted by an aging population?
Speaker 3 (11:23):
Yes, Actually that is a great question because Japan stands
out for many reasons. So similar to career, Japan is
heavily affected by aging. It has a very high participation
rate among over sixty fives, and female participation rate has
been rising rapidly. So that's another example of how aging
(11:46):
population adaptation measures can be put in place to offset
the trend of demographics. And what we have seen is
that sectors like healthcare, sectors like elderly home elder care
that very much cater to age in population are while
positioned to benefit, but it may not happen straight away.
(12:10):
So this is a question that we get a lot,
which is that demographic trend is the most predictable trend.
It's written in the shape of the population for years
and years and years. How do we position for that,
because it must have been so clear for everyone to
position for that, because it's inevitable, this is the direction
of travel. What we have seen is the relative performance
(12:34):
of healthcare as a sector over the broader appley market.
That relative performance actually closely closely mirror the dependency ratio
in Japanese economy, which means that even though this is
something that was very predictable from years ago, the performance
doesn't come through until the economic data actually clearly supports
(12:58):
the population aging. So investment opportunities can still be found
by positioning for those trends now. Because our study shows
that it takes time for the relative performance to come through.
It takes time for markets to adjust for the relative trend,
(13:22):
and it doesn't happen straight away. And I think that
is because markets are oftentimes only capable of focusing on
one thing and it doesn't have that as much long
termism in terms of how ahead it looks. That means
that even something as slow moving and as predictable as
demographic trends can still produce investment opportunities for us to capitalize.
Speaker 2 (13:48):
So how do you sort of price it in or
position for it now? Because as you said, these are
very long term trends, demographics aging, long term trend Are
there ways that investors today can sort of make a
bet on certain economies or certain markets or certain companies
And if so, what would those be? How would you
(14:09):
advise an investor today on that?
Speaker 3 (14:12):
Absolutely, so there are three ways to think about it.
So over the long term, sectors like healthcare, like infrastructure
can really benefit from the greater demand as populations age,
which is something that we can position for even right now,
even though it is predictable, because as I said, markets
can be quite slow in price in the impact of
(14:36):
this predictable trend. So this is one way and not ways.
Is do you look at countries with higher demand for investment.
You talked about India, There are other countries likely in
emerging economies, emerging markets with greater population growth that are
likely to offer investors higher returns. So here we're talking
(14:57):
about greater investment opportunities in productive capital like machinery, transport, infrastructure, housing, schools,
and hospitals. And here again countries in Asia like India
Indonesia standout. They have had very high investment rates historically
and that is even adjusted for population growth because they
(15:21):
urganized very very quickly. Right our study of the demographics
implies that this is still likely going to be true
in the coming years and decades. So that's another way
of looking at that. And then on a shorterm basis,
there are trends that are impacting markets that may not
be here to stay and that requires immediate kind of
(15:45):
attention and positioning portfolios for So a case in point
is if you look at the larger than expected rise
in immigration in the US. Right, So I give you
an example. In January, the CBO revised it's immigration number
for twenty twenty four to three point three million, which
is a record breaking level and up from around one
(16:07):
million expected the year before. And what that has down
to the US economy, which is the biggest economy, the
biggest market globally, is that that has unexpectedly boosted payrolls
this year and helped service inflation to cool down at
least temporarily. So for coming out of the pandemic and
(16:30):
throughout the course of the pandemic, sticking inflation has been
a main consideration for the FAT in terms of how
quickly it can cut rate. So the fact that the
immigration boost, that the larger than expected immigration, the positive
supply shop to the US labor force, meant that service
inflation was cooling down faster than expected, at least temporarily.
(16:52):
And at the same time you look at the growth picture,
it's actually somewhat resilient, right. And I think this micro
backdrop much helped the US economy US equity market performance. Yes,
a lot of that earlier on in the year has
been concentrated in the AI theme, but now it's very
much supported by growth is holding up okay, and inflation
(17:15):
is dropping very much thanks to the positive supply shock
of the immigration front. And this is not something that's
just happening in the US, right. Immigration has also been
increasing in Europe as well, but this is less talked about.
So these are the near term ways that investors can
(17:36):
look at to capitalize changing trends usin populations.
Speaker 1 (17:41):
That's quite an interesting view because immigration is often blamed
for increasing housing prices rent in these countries, but it's
obviously had a you know, a positive impact on inflation.
I wanted to talk about China. Now, China is also
having a big problem in terms of an aging population.
(18:01):
How does that impact your views on China and what
could happen if China, like, you know, possibly follows down
the root of you know, careers fertility rate.
Speaker 3 (18:12):
Yeah, so China is no longer the most populated country
in the world, and this is a challenge for long
term growth. Right. So there is kind of cyclically what's
happening to the Chinese economy, and the central authorities are
trying to support the economy, but maybe the measures are
so far piecemeal and not big enough, not the big
(18:33):
boluka that markets sometimes are hoping for, which also explains
why Chinese accrea market is the one major apple market
that is done since the pandemic rather than so cyclically.
There are challenges, but over the long term, declining population
is a big reason, together with the needful reform, why
(18:55):
we believe Chinese economy is slowing down. Right, So by
the end of the decade, we are expecting Chinese economy
to have a three handle in terms of annual growth,
which puts it not much faster in terms of growth
rate than many developed economies. So all of that just
to say, aging population, aging demographics is a structural headwing
(19:20):
for Chinese growth or else equal. But as I said earlier,
how the countries, how China adapt to this by incorporating
AI industrial robotics and also kind of on the immigration front,
could potentially help offset some of that.
Speaker 2 (19:41):
So I wanted to come back to that idea that
an aging population can actually be inflationary because a few
examples we have recently show that the opposite might be true.
You know, you have this last period in Japan China
as well as running into deflation issues right now, isn't
(20:02):
a period of deflation and has some challenges in demographics
and aging. So why does black Rock see that this
demographics issue could actually be inflationary to economies.
Speaker 3 (20:14):
This is a great question, Katina, And our view, as
I said earlier, is that it's a somewhat non consensus view, right.
We say that we disagree with consensus in believing that
aging population would be inflationary, and a lot of the
consensus was very much driven exactly by the last decades
in Japan. It was a period when Japan was aging,
(20:37):
and it was also clearly a period of deflation. But
I would say that our conviction was very much framed
around or else equal, this is what we expect to happen.
But in the case of Japan, there were other episodes,
other factors playing out that led to this period of
(20:58):
both aging and deflation. So first, we had the late
nineteen eighties asset price bubble, talking about the stock and
housing market bubble that led to the subsequent last decade
and the banking crisis, and these crisis clearly were deflationary
and played a more dominant role than the population demographic trend.
(21:22):
And second, if you look at the broader global picture
when Japan was aging, so Japan was aging when the
rest of the world was not. So Japan's workforce was
shrinking at a time when labor was abundant elsewhere in Asia,
and China was integrating in the global labor market. Like
(21:43):
China was growing, the population was younger, it was joining wto.
So the global dynamics has meant that if Japan's companies
invested heavily abroad, and they did, they were able to
reduce production costs and they did not. Fast forward to
where we are now twenty twenty five, we're in a
(22:04):
fundamentally different environment. You know, we talked about other mega
forces also playing a big role, and they are interacting
with each other. Geopolitical fragmentation is another mega force, and
geopolitical tension has meant that globalization is stalling, is getting rewired.
And additionally, many developed economies and some emerging markets China
(22:29):
included aging at the same time, so globally, as I
was citing this figure, the dependency racial previously was rapidly
decreasing prior to right before the pandemic, and now it
is no longer the case in facts moving in the
other direction. So the global dynamics, the global context is
(22:50):
no longer helping. So in a way, Japan was aging,
but supported by the broader picture that aging economies now
can no longer depend on as a japandee back.
Speaker 2 (23:02):
Then do you find that more investors and maybe even
more of your colleagues are asking about this topic more?
Speaker 3 (23:12):
I tell you one anecdote, and the short answer to
this is yes, but it's a funny anecdote. So I
hosted the Internal Investor Summit twice a year, and every
time we talk about what was important for the economy
and for markets. The last Internal Investor Summit that I hosted,
(23:32):
I framed it around mega forces. I framed it around
the five mega forces that we just talked about, and
I asked investors to kind of give their preference in
terms of which one they want to deep dive into
in breakout sessions, so AI had the most interest and
(23:53):
aging population had the least people joining during the breakout.
But when we then bring everyone to get back on
stage to debate how much more is in the price
where the delta opportunities are actually the aging population mega
force presented disconnect and opportunities in a way that is
(24:16):
more surprising that there is more surprising than the other
mega forces. So the some bite that I took away
from this Internet investor summits that I alsto is the
investors were telling me it's the most boring and predictable trend,
and yet it is the most important trend to get right,
given how much disconnect there is between the attention paid
(24:38):
to it and the opportunities that it represents. So yes,
more and more focused on this trend.
Speaker 2 (24:44):
So who knew aging could be sexier than AI?
Speaker 3 (24:48):
They're both sexy.
Speaker 2 (24:50):
Well, we've covered a lot of themes and ideas here.
Is there anything else that you wanted to talk about?
Speaker 3 (24:58):
Nothing new other than to reiterate the importance of paying
more attention to structural forces at this point compared to before.
Right now, cyclical data are very noisy, and especially given
(25:19):
the distortion coming out of the pandemic as some of
the mismatch on wines, it's very noisy. And if we
don't have a proper anchor for how economy is playing
out and what markets should be focused on, then we
could really make the risk of extrapolating too much a
couple of data points and swing wildly in terms of
(25:42):
the narrative. Right like you saw at the beginning of
the year, the heart landing narrative and then soft landing narrative,
and the no landing narrative and a heart landing narrative again.
You see how just paying attention to cyclical adds and
the flows can be very unnecessarily volatile and confused. And
whereas a lot of this can be explained when we
(26:03):
put on that structural head, when we view what's happening
through the structural lens. So all of that just to say,
mega forces and structural forces are going to matter more
and more, and the effect and the interplay of these
mega forces are likely going to amplify its impact on
the macro environment. So the time is now to be
(26:23):
paying attention to aging population. The time is now to
be paying attention to the low carbon transition in terms
of the broader impact.
Speaker 1 (26:32):
Fantastic, It's been a fascinating discussion on demographics, Asia's aging
population and how this impacts investment decisions. Thank you way
for joining the show.
Speaker 3 (26:44):
Thank you so much for having me. I really enjoyed
our conversation.
Speaker 2 (26:48):
I'm John Lee in Hong Kong and I'm Katidmitrieva, also
in Hong Kong.
Speaker 1 (26:53):
This episode was produced by Clara Chen and you've been
listening to the Asia Centric podcast
Hosts And Creators
John Lee
Tom Corbett
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