Can investors still profit from Asia's growth?
21 November 2017 | Markets and Economy
Global Macro Matters: Population growth can help drive economic growth, as we've seen in fast-growing Asian countries like China and India. Slow-growth countries like Japan are paying an economic price. This conversation features Vanguard Senior Investment Strategist Jonathan Lemco and Andrew Patterson, a Vanguard senior economist.
Lara de la Iglesia (moderator): I want to now talk about demographics in terms of developed to emerging-market economies if we can. Jonathan, when it comes to measuring economic growth on a country-by-country basis, how does demographics factor in, in regard to the pace of that growth?
Jonathan Lemco (Vanguard senior investment strategist): We know it's an important factor. There's any number of factors that go into economic growth as a whole. But, certainly, population change is one of those factors, along with productivity change.
So, the developing world is expected to have three-quarters of the births in the world going forward over the next 20-odd years or so, 20 to 30 years, three-quarters of them if you will. And many of these will be in Asia in particular – the fastest growth in terms of population is going to be in countries like India first, such that within a few years it is expected to overtake China.
Lara de la Iglesia: Wow.
Jonathan Lemco: But China itself is growing in population now that it's ended its one-child policy. Indonesia, again, the fourth most populous country in the world today, growing very rapidly in terms of population growth too. Asia as a whole is leading the world in population growth, and that doesn't tell us necessarily that in the short run, at least, that productivity from Asia will be that much more rapid than it is in the industrialised West. In fact, as we speak today, we're told by economists that, approximately, by a ratio of 5:1, we are more productive in the industrialised world than in the developing world. But nonetheless, that difference is closing and over time will continue to close further, more rapidly.
Andrew Patterson (Vanguard senior economist): And a lot of that has to do with technology, technological adoption.
Jonathan Lemco: Absolutely.
Andrew Patterson: Different countries, be it developed or emerging markets, their place in the global value chain.
Lara de la Iglesia: So, Jonathan, if you could, can you maybe do a bit of a case study, a deep dive on a country that has experienced a significant shift in population? What are the impacts that that's had on the country's economic growth?
Jonathan Lemco: One country that just jumps out at me is Japan. This is one of the richest countries in the world. It is among the healthiest countries in the world, where people have amazing diets but live as long as anywhere. But as a consequence, growth has been really negligible, relative to many other industrialised countries.
Japan starts at such a high base, it can afford to falter for years and years; but that's exactly what is happening as there's so little population growth, even at times negative population growth. Immigration is also negligible. It's very tough to emigrate to Japan.
So as a result, to the extent that economic growth is based in part on the growth of population or on immigration, those are mostly absent in the case of Japan. As a result, as well, older people who do need more health care and so on, put a big, big drain on the national budgets of Japan.
One of the consequences of that is looking at their public debt-to-GDP ratio, which at about 247% is virtually off the charts. Within large industrialised countries, it is by far the highest. The United States is somewhere around 100[%]. Mr [Shinzo] Abe, the prime minister, has sought to bring about reforms, but so far with limited success. This is a big problem for Japan. It's a big problem for all of us because Japan has vital investment and trading relationships with all of us.
Japan is not all that unique. You do see this to a lesser degree in countries like Italy or developing economies like Russia, where you may have negative population growth. It's just Japan really counts, and it jumps out at you as a problem.
Lara de la Iglesia: You touched upon immigration. How does that factor in?
Jonathan Lemco: This is anecdotal evidence, but by and large if given a polity, in the United States's case, can attract many of "the best and the brightest" from around the world. And then, in turn, we have reason to believe that these people, if they choose to stay here, will create jobs by opening enterprises or become professionals in this country.
The US has an amazing advantage over virtually any other country in the world in that approximately half of the world's great graduate schools are physically in the United States. And that attracts many of the best and the brightest from everywhere who want to study here. And we hope that once they come here, they will stay here and build their lives here and thereby contribute to the economy.
Any look at "who's who," particularly in the tech world, of leaders, then you find they were people who were immigrants to this country. And so, immigration to this country, to Canada, to Australia, to the UK, to New Zealand – those are the big five – have provided amazing improvement in the broad economy and, in turn, quality of life for many of their citizens. So, immigration is key to this process too.
Lara de la Iglesia: Some of this is very interesting, to say the least. I don't want to say alarming by any means. It's interesting. What does it mean for investors really? How do we boil this down?
Andrew Patterson: I would say in terms of investors and their chances for investment success, it is just that – it's interesting. To be making portfolio allocation decisions or investment decisions based on demographics, I find it very difficult to make a case for that. Demographics, for all the economic fundamentals, tend to be very slow moving in nature and relatively easy to predict. No one has a crystal ball, but demographics provide one that's about as close as you're going to get.
Lara de la Iglesia: So that means it's priced in when you say that?
Andrew Patterson: Exactly, exactly. So just because we've been talking here about slowing population growth in Japan, that's been known for quite some time; and the expectation is for it to continue to do so. Markets being reasonably efficient, we believe that that's factored in. So, to go out and over/underweight Japan based on that type of information, investors may be a bit late to the game in that regard.
I would say put more of your focus on your own demographics, your own personal situation. What are your goals? What's your investment horizon? Have there been any big changes in your situation? Those are the factors that tend to have significantly more impact on your own individual success rather than focusing on things like demographics.
Lara de la Iglesia: Great. Thank you guys very much.
Andrew Patterson: Thank you.
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