J.J. Zhang’s Winner Take All: The countries where you can cash in on growth and the demographic losers
Looking for growth is never simple. To find winning companies, you can see who has the better product, new technologies to steal market share or is just the more efficiently run company.
But with investors today buying whole-market exposure with index ETFs, finding that growth will be even more difficult. When you own the whole market, stealing market share or customers is a zero sum gam —- the profit you gain from one index component will be offset by the loss in another. While productivity gains and other factors can still generate some overall market returns, to truly find growth you’ll have to look at underlying economic trends instead.
Population and demographic factors are one of the most important overall economic drivers. At its core, population growth and its economic impact seems straightforward. The more people there are, the more tangible assets such as growing crops or mining natural resources can be done and the more intangible work such as providing services and researching new innovations they can provide. And each living person needs to consume by buying food, clothing, property and so on, which all contribute to the economy.
Demographics throw a small wrench into that simplification as giving birth and raising young children can temporarily detract workers from economic output. Similarly, old age and supported retirees can potentially be a drain on their children’s consumption or retirement plans and shift spending to industries such as health care. Large, young, working-age populations, in contrast, represent an opportunity for juicing growth as demonstrated by China’s ability decades ago to leverage its population to supercharge its manufacturing boom.
However, the large population boom, and perhaps the accompanying economic boom, of the last few centuries is all but over. Most of the industrialized world instead now faces the prospect of general population decline and, in some cases, an extreme population cliff. According to United Nations projections, this year advanced-economy countries will face the first decline in combined working-age populations since the post-WWII period.
In these regions, broad-based indexing may do little to help returns as the overall economy shrinks. Here’s some of the regions with the biggest population impact and thus the most caution from a long-term overall investment standpoint.
- Japan is a perennial example on population and demographics. Japan’s population was estimated to have peaked in 2008 at 128 million people. In 2015, it’s estimated at 127 million, a small drop. However, by 2050, the population is projected to fall below 100 million and to 87 million by 2060, with no signs of stabilization. Japan’s labor force peaked 20 years ago and the Nikkei has seen a 15% drop since. At current rates, Tohoku University predicts Japan will hit near extinction by 3776. Beyond just population numbers, the demographic problem will be even more severe. By 2060, over 40% of the population will be over 65. Imagine you’re a business owner in Japan in 2060 — nearly a third of your current customers will be dead and almost half remaining will spend like an old grandpa on minuscule government welfare subsidies. Not exactly a recipe for economic growth. Market based indexing wouldn’t save you here.
- Japan is not the only country with this problem. South Korea has not been above the natural replacement fertility rate of 2.1 since 1982 and currently sits at 1.2, one of the lowest in the world. While still growing slowly, it’s projected to have peak population in 2023 at 53 million before following Japan’s decline.
- Singapore is another Asian success story with a bleak future. With a low fertility rate of 1.25, it’s projected to hit peak population within the next five years, excluding immigration changes. Singapore already is seeing record low growth in recent years and flirted with technical recession last year, partly exacerbated by manpower shortages.
- China is another surprising story. People are used to the thought of China as the most populated country without realizing how disastrous the one-child policy was on demographics. China’s fertility rate was recorded at only 1.18 in 2010, and the number of workers has been declining since 2012. Depending on the source, China is forecasted to hit peak population between 2020 and 2035. Thanks to the one-child policy, its aging demographic problem is potentially the worst in the world. With retiree government welfare being virtually nonexistent, there are real scenarios of families having to support four retired parent-in-laws on top of any children they have. Though the government has begun to recognize the problem, such as the recent two-child policy, it’s far too late.
- The U.S. is in a more neutral situation. While native fertility rates have dropped to 1.86, below the 2.1 replacement rate, immigration is still more than making up for that gap. Assuming current immigration levels and fertility rates, the U.S. is expected to continuing growing population all the way to 417 million by 2060. However that estimate may be high given the historical pattern of dropping fertility rates over time and recent anti-immigration fervor. Hispanics, for example, are currently the only ethnic group significantly above the natural replacement rate but they’ve already seen a 30% drop over the last 20 years. As the baby boom retires en masse, demographics will play a big role in U.S. economics, especially as Social Security and pension programs face potentially insolvency.
On the flip side, there are several countries where population and demographics are still growing and can play into a strong rising tide effect:
- India is one of the few large countries still with a growing population, at 2.4 fertility, 20% above the replacement rate. The working force population is also quite favorable with an average age of only 29 by 2020 and will add the equivalent of the entire U.S. labor force every decade. This large English-speaking, educated force is starting to make major headway in both local and global economic impact with the rise of companies like Reliance and Tata Motors. Combined with a relatively stable government and institutions, the potential is there.
- Philippines and Indonesia are additional examples of growing countries, with fertility rates of 3.0 and 2.5 respectively, which offer a large potential consumer population, a growing middle class, and a very favorable labor force demographic. Though Indonesia markets have performed poorly in recent years, the Philippines have been a rising star in global markets, recently winning its first investment-grade rating.
- Beyond these countries, most high population growing countries tend to be questionable in utilizing these opportunities to grow. With the list of high fertility-rate countries being mainly poor and unstable African or Middle Eastern countries, it’s advisable to avoid unless you have an unusual craving for investing in countries like Madagascar or Somalia.
However, before running off to invest in fertile countries via country-specific ETFs, it’s important to note that population and demographics are not everything. Productivity, education, innovation potential, corruption, government inefficiencies and others all play a major role on the economy.
Population is a big headwind or tailwind that can either be leveraged to create growth or be a drag on future economic activity. Nonetheless, it’s an important factor on your portfolio returns as you consider geographic asset allocation.