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