Tuesday, 13 November 2012

Investment Adventures in Emerging Markets  (Notes from Mark Mobius)


http://mobius.blog.franklintempleton.com/2012/11/02/shifting-demographics/#more-1923


Home > Perspective > World’s Economies Come of Age

World’s Economies Come of Age

November 2, 2012 Leave a comment Go to comments
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As we grow and age, our needs and habits often change. The same is true of economies, which grow and change along with their people. Short-term statistics that impact a country’s economic growth rate, such as consumer spending, exports and the like are certainly important, but there are also long-term shifts that can have significant economic implications for the future. Changing demographics is one of them. As a long-term investor, I have to look not only at today’s opportunities, but also plan for tomorrow’s developments.

In many parts of the world, the number of retirees and pensioners is expanding as longevity rates improve and the working-age population shrinks. In the U.S. and Europe, legions of the post-World War II “baby boom” generation have started to enter retirement age. This generation represents nearly a third of the U.S. population, and every day, some 10,000 of these individuals turn 65.1 This means it’s likely that a heavier burden will fall on fewer younger workers in the future. Similarly, in the EU today, there are four working people (aged 15-64) for each non-working person over the age of 65. By 2060, the European Statistical Office projects that ratio will shrink to 2:1.2
Nations with more mature populations typically require increased social services, including health care. Consumer spending patterns may also shift to reflect the particular needs of this group. The demographic math of fewer workers plus an aging population can lead to a drag on economic growth, but some economies are actually dealing with the opposite dynamic. As some nations strain to accommodate older populations, others are coping with a swell of younger workers, potentially leading to some interesting long-term global shifts in growth and economic development.
BRICs Aging Too
One of the reasons I am enthusiastic about emerging markets is because of their generally younger populations and their related higher growth rates compared with most developed markets. However, not all emerging markets are immune to the aging population trend. According to United Nations projections, the number of people aged 65 or older in Brazil, Russia, India and China (“BRIC” nations) is expected to increase 46% to 295 million by 2020, and to 412 million by 2030, while the pool of 15 to 24-year-olds is expected to drop.2
Trends in fertility and mortality are primary drivers of demographic patterns. In China, the official one-child policy, created in 1979, has been impacting the working population with interesting implications. The UN has projected that, by 2015, the number of individuals aged 65 and above will increase 78% to 195 million in China.3 As its population ages, China’s past challenge of an over-abundance of workers could turn into a different problem—a shortage.
At the same time, the structure of the family in China is changing. Today, households may be made up of multiple generations under one roof, married couples with “dual incomes and no kids” (“DINKs”) or, in increasing numbers, singles dwelling alone. An example of what this shift can mean to the economic landscape is the fact that an increase in the population of singles and DINKs creates more housing demand, and generally requires more private or government assistance than family dwellers.  From my long-term perspective, this means we should examine potential opportunities in sectors including healthcare, housing and consumer goods that could support and benefit from this dynamic.
Saving and Investing for the Future
We know that right now, many emerging countries have lower levels of debt and higher levels of savings than many developed economies. Many people in emerging nations do not have high levels of participation in formalized pension schemes or retirement plans, and there may be fewer social safety nets, reasons why personal savings rates may be higher there than in developed countries. For example, household savings rates in China and India are roughly five to eight times higher than in the U.S.4
This has pros and cons from an economic standpoint. When personal savings rates are high, that can mean there is less consumer spending. However, those savings held in banks can be loaned out for capital investment in plants, machinery and infrastructure. Also, balance sheets in such situations are often stronger with less leverage at the consumer and national levels. As populations age, governments face the challenge of how to allocate limited public resources to those without adequate savings, while drawing from fewer workers to support the tax base.
The emerging markets generally have lower median ages than most developed nations, and while this certainly isn’t the only factor to consider, I think it’s something to keep in mind when looking for global investment opportunities. Of the BRIC nations, India has the youngest population today with a median age of 26.2.5 This is one of the reasons I believe India holds good long-term growth potential.  Its young and growing working class could help fuel the economy forward, with more discretionary income to spend as living standards continue to rise.
Compare that with Germany, for example, which has a median age of 44.9.6 Eurostat predicts that Europe’s median age is expected to rise to 47.6 by 2060, and those aged 65 or older will make up 29.5% of the population, up from 17.4% in 2010. At the same time, longevity is increasing, and the number of those aged 80 and above is expected to triple over the same time period.7
Frontier Markets = Generally Youthful Populations
From an investment standpoint, frontier markets, which are a subset of emerging markets, look even more interesting to me when you take demographic factors into consideration. I believe many frontier markets’ youthful populations and strong growth rates—generally higher than that of emerging or developed markets—contribute to their investment appeal. Africa in particular boasts some of the fastest growth rates in the world and some of the youngest populations, reasons why I’ve been enthusiastic about the continent. I’ve witnessed the potential there firsthand.
In developed, emerging and frontier economies, I think it will be paramount for policy makers to boost productivity in the face of these trends, including efforts to expand the pool of highly skilled labor.  In my view, and as we’ve seen evidenced recently in the developed world, overleveraging at the economic or individual level has not been the path to long-term prosperity. It appears some of the heavy social nets of the past may not be relied upon in many countries, so individuals may need to take greater fiscal responsibility for their own retirement planning. (It’s never too early to start, by the way.)

1. Source: ©Pew Research Center, Social and Demographic Trends Project. “Baby Boomers Reach 65 – Glumly. December 2010. Pewresearch.org/pubs/1834/baby-boomers-old-age-downbeat-pessimism.
2. Source: European Statistical Office, Eurobaromoter, “Active Ageing,” January 2012,
3. Barry Mirkin and Mary Beth Weinberger, Population Division, United Nations Secretariat, “The Demography of Population Ageing,”1998.
4. Sources: OCED Library,” Household Savings Rates – Forecasts, 2006 – 2013; © 2009 International Monetary Fund, all rights reserved.
5. Source: CIA World FactBook, June 2012.
6. Source: CIA World FactBook, June 2012.
7. Source: Eurostat. “Population Structure and Aging,” October 2011.
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