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.
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 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.
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 and robotics.
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.
Thank you so much, Katia and John for having me Wall.
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?
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
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. 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.
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.
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, 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 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,
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 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 the aging place in that then affect the economy and markets.
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Now?
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?
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 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 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. 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 by investing in automation and AI, which we have seen in Korea, Japan and also other parts of developed economies as well.
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.
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 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 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 good examples that can be found across the world. But Korea Japan are very much standing out in Asia.
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 the fertility issue is the biggest in these East Asian countries.
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 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.
Yeah, and basically dependency ratio, as you said, it basically means that we're seeing more old people to young people essentially.
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 can help offset some of the headwinds from aging population.
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 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?
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 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. 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 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 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, 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.
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 advise an investor today on that?
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 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 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 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 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
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 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. 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 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 look at to capitalize changing trends usin populations.
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. 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.
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 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 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
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.
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 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.
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, 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 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.
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 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 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 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
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.
Then do you find that more investors and maybe even more of your colleagues are asking about this topic more?
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,
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 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 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 to it and the opportunities that it represents. So yes, more and more focused on this trend.
So who knew aging could be sexier than AI?
They're both sexy.
Well, we've covered a lot of themes and ideas here. Is there anything else that you wanted to talk about?
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 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 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 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
paying attention to aging population. The time is now to be paying attention to the low carbon transition in terms of the broader impact.
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.
Thank you so much for having me. I really enjoyed our conversation.
I'm John Lee in Hong Kong and I'm Katidmitrieva, also in Hong Kong.
This episode was produced by Clara Chen and you've been listening to the Asia Centric podcast