Transcript
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Speaker: Welcome to Under the Banyan Tree, where we put Asian markets and economics in context.
Speaker: I'm Harold van der Linden, head of Asia Equity Strategy at HSBC.
Speaker: And I'm Fred Newman, chief Asia economist.
Speaker: Good to have you with us on today's podcast, the here and now of Asia's big demographic shift.
Speaker: It's a period of unprecedented change for the region and the world.
Speaker: We're here to bring you the key information and why it matters.
Speaker: As you might expect, age, wealth and gender are all coming up on today's episode.
Speaker: But so is a lot more from craft beer to the concept of destiny.
Speaker: Pull up a seat and join us on the Albanian trade.
Speaker: Now, an important thing to remember right off the bat is that demographics is often a discussion that's framed in the distant future.
Speaker: That's not what we're here to talk about today.
Speaker: The world, for the first time in human history, is aging in a faster pace than ever before.
Speaker: This is especially pronounced in Asia, and it's playing out right in front of us in real time.
Speaker: That's right, Fred.
Speaker: Here are some key stats to put it all in context.
Speaker: China's population has been rising by 50 million people per year since 2013.
Speaker: It is now set to shrink by nearly 19 million people every year by 2033.
Speaker: That's a swing larger than the population of France in just two decades.
Speaker: In Japan, there will be 700,000 fewer people per year for the next 10 years.
Speaker: While in Korea, the working-edge population will fall by more than 1% every year, leaving fewer workers to power the factories, the offices and the economy.
Speaker: And of course, the big one that you might have already heard of, in 2023, India is due to overtake China as the world's most populous nation.
Speaker: So Fred, some momentous changes taking place in Asian demographics.
Speaker: This has got some major implications for you as an economist, right?
Speaker: Well, as economists and also as financial market participants, we're so focused on the day-to-day headlines, right?
Speaker: But in the backdrop, there are these momentous forces that really are driving economics, business decisions, and those are demographics.
Speaker: And we actually have, according to the latest UN projections,
Speaker: we have 2023 being a major, major turning point.
Speaker: We call it the big demographic shift across Asia.
Speaker: Now, famously, India, according to the UN, will exceed China in terms of population, but we also have China shrinking, China's population shrinking for the first time ever this year, and also Korea will join this year, the countries where populations are actually shrinking.
Speaker: But not only that,
Speaker: Asia is actually aging faster than ever before.
Speaker: For example, in Europe, it took about 48 years for the average age to go from 30 years to 40 years.
Speaker: That's a span of two generations.
Speaker: In Asia, it's happening in less than one generation.
Speaker: In Korea, for example,
Speaker: it takes only 17 years for the average age to go from 30 to 40 years.
Speaker: And that has enormous implications, reduced availability of workers, for example, not just in Northeast Asia, but even in Southeast Asia, the number of workers is slowing.
Speaker: But then, of course, also changing population structure, where we far more older people,
Speaker: For example, 2019 worldwide was the first year when above 64 year olds were more numerous than kids up to the age of nine.
Speaker: So we're seeing this shift where the first time ever globally, old people outnumber young people.
Speaker: Yeah, I mean, for me, one of the implications here for companies, if I think about it, is simply that if you have a business strategy that wants to sell the same product to more and more people, in essence, that's going to be a problem.
Speaker: What you want is to sell a better product at a higher price to maybe fewer people, right?
Speaker: So you need to make sure you have a premium product.
Speaker: And given that there are more elderly people,
Speaker: they tend to be a little bit wealthier than definitely the nine-year-old, but say also the 25-year-old, you get a process of what we call premiumization.
Speaker: And I think the beer industry across Asia is a very nice example.
Speaker: In the past, the vast majority of profits in the beer industry were in kind of commodity beers, if you want to call them like that.
Speaker: But now people going for craft beer, higher end beer, they're willing to pay up for a better quality product
Speaker: because they can so.
Speaker: It's a shrinking market in numbers, but still can be an increasing market in total value.
Speaker: And I think that's a good point.
Speaker: We should see this as an opportunity also, not just as, oh, demographics are moving, shifting, aging, and therefore we have lower economic growth.
Speaker: There's a lot beneath the surface that offers opportunity.
Speaker: But before talking about some of these opportunities, it's also important to think about that
Speaker: Well, yes, the working age populations might be shrinking in many economies or slowing down, at least in parts of South Asia and Southeast Asia, but there's also a lot governments can do to offset this.
Speaker: And one example is to raise the female participation rate.
Speaker: for example, because actually in India only about 20% of the female population is participating in the workforce.
Speaker: If we brought this up to the level where of female participation in the Philippines, that would add about 115 million workers to the workforce.
Speaker: And the Philippines doesn't even have a high female participation rate.
Speaker: Japan actually just did this over the last 10 years, famously very adverse demographics, but they managed to push up
Speaker: the female participation rate and thereby easing some of these constraints.
Speaker: But surely that also has implications for investors because it means then female workers have incomes, they have different consumption patterns.
Speaker: Yeah, I mean you're giving here two interesting examples because India is the female labor rates are really low.
Speaker: And there are structural problems with that because you need to provide people with the education and the means to also get a job.
Speaker: And that is not always the case, I would say, in India.
Speaker: And the Philippines might be different there.
Speaker: But yes, there is an untapped potential there.
Speaker: Demographics itself help this as well.
Speaker: Take Indonesia, for example.
Speaker: The existing generation of say people my age, I'm in my early 50s, so my brothers and sisters-in-laws in Indonesia, they have fewer children.
Speaker: The birth rate has fallen.
Speaker: So that means that the mother doesn't have to stay at home to take care of five children.
Speaker: No, she's got maybe one or two.
Speaker: That frees up time for her to work.
Speaker: And that's what we see.
Speaker: These societies...
Speaker: It's not that women can't work for whatever reason, it's also that they have that ability to work.
Speaker: And that means that the consumption pattern changes.
Speaker: Imagine you have a smaller family of one child and a husband and a wife is working.
Speaker: Then what you typically do is in the evening you go to a convenience store and you get a ready-made meal instead of cooking at home yourself because you just don't have the time for that.
Speaker: Or you order food in.
Speaker: So that comes also with kind of new opportunities, new shifts in consumption that we see across the region.
Speaker: So aging and lower birth rates help in that sense.
Speaker: And we have, of course, the female participation rate going up very likely out of necessity, but also, of course, that's a positive societal trend.
Speaker: But you also have, and this is, I think, almost the most important aspect for both economists and for investors,
Speaker: is a change in the population structure.
Speaker: That is, we're seeing different age cohorts growing and declining within populations.
Speaker: So for example, if you look at India, people in their teens over next year,
Speaker: 10 years will actually decline in numbers by about 21 million.
Speaker: So there's fewer teenagers around, but you'll see people in their 40s in India actually increased by over 37 million.
Speaker: That's the equivalent of the population of Poland today.
Speaker: And people in their 40 consume differently from people in their 20s or 30s.
Speaker: They might, for example, just be at that level where they haven't saved enough to buy a home, so housing demand goes up.
Speaker: Maybe car purchases go up because you're just in that age bracket.
Speaker: And of course, that's just India.
Speaker: But we have other economies where you have these changes as well.
Speaker: Yeah, let's take China here.
Speaker: Because in China, you see similar shifts, but the numbers are different.
Speaker: So in the 30s, people that are in their 30s, in that particular cohort, that is going to decline over, say, the next 10 years by about 50 million.
Speaker: But the people in their 60s in China is going to go up by 70 million over the next decade.
Speaker: So China is older than India in that sense.
Speaker: And people in their 60s consume differently.
Speaker: They don't spend that much on property because they have property already.
Speaker: They have bought their car already.
Speaker: So that, again, different consumption patterns.
Speaker: The interesting thing here is think about an Indian family and a Chinese family that make exactly the same income.
Speaker: The Indian family is a husband where the wife doesn't work.
Speaker: I'm just making a very generic example here.
Speaker: And he's got three children.
Speaker: So on that income, he's got basically five people to support, including himself.
Speaker: In China, because of the one-child policy, on the same income, it's a husband and a wife that very often works.
Speaker: Female participation rates are really high in China.
Speaker: And one child.
Speaker: So they got three people.
Speaker: So with the same income, they have a better ability to go for more discretionary spending already and luxury spending than the Indian family in this particular generic example.
Speaker: And then that's further amplified by the fact that the Chinese are older, as I just mentioned.
Speaker: And on average, we have to, though, acknowledge that really the fastest growing age cohorts across the region are people in the 60s and 70s because Asia is aging so rapidly.
Speaker: And one other area where there's likely going to be increased demand must be health care because, of course, as we move into our 50s, 60s, and 70s, we need more of that.
Speaker: And therefore, that certainly must be one of the boom areas then as well.
Speaker: Absolutely.
Speaker: And it's not just the aged society where healthcare is going to grow.
Speaker: It's those where most of these people are now in their 30s, but are going to be in their 40s.
Speaker: Because healthcare spending, if you look by cohort, it is quite low until you hit 40.
Speaker: Then it goes up fairly rapidly, and it just doesn't really come down after that.
Speaker: So it's those societies that go from 30 to 40, and from 40 to 50, where healthcare spending is going to go up a lot...
Speaker: And one other very interesting observation here is that as people move into their 40s and 50s, and you hinted at that already, they save more because they worry about retirement.
Speaker: And actually, the pension coverage in Asia, the payout ratios aren't very high.
Speaker: So people feel the need to save themselves quite a lot.
Speaker: And so we see saving rates go up as the population increases.
Speaker: uh... balt moves from the twenties and thirties into the forties and fifties and that incidentally is occurring virtually across the issue now this is actually then a so-called second demographic dividend the first demographic dividend is if you have young populations new and to the working age population more workers help gdp growth but the second dividend is actually when people move into that saving bracket because saving rates go up
Speaker: and that allows for more investment in the economy which gives a second kind of kick to economic growth.
Speaker: So there's a subtlety here also from the macroeconomic perspective actually saving rates go up as a result the cost of capital declines and investment increases and that's we see that in a number of economies coming through.
Speaker: Vietnam is for example an economy where the first dividend, first demographic dividend is starting to fade very quickly
Speaker: But the saving rate has started to increase, which should help to prolong the economic boost from the demographic patterns.
Speaker: Absolutely.
Speaker: So for an economist like you, it is not unreasonable to assume that in certain countries, that second demographic dividend, the benefits of aging through more accumulated savings, could outweigh, at least for some period in time,
Speaker: the negative effects of a shrinking population, right?
Speaker: So aging and shrinking populations don't necessarily have to be macroeconomically negative in that sense, right?
Speaker: That's right.
Speaker: And actually, we often also, and this is a subtle point, where there's a misperception, is just because GDP growth may slow or even shrink doesn't mean that per capita income doesn't continue to increase.
Speaker: Japan famously had a long period where actually per capita income growth...
Speaker: grew faster than the US.
Speaker: Just the overall economy shrank.
Speaker: And so that obviously affects, and again, spending patterns, the ability for discretionary spending.
Speaker: Yeah, also for companies that tap into that market for savings, because these people in their 50s and 60s that put money, they need to put it somewhere, right?
Speaker: And that could, of course, be gold or property.
Speaker: They have it very often, but it could be mutual funds or a bond fund or
Speaker: whatever they buy.
Speaker: So financial advisors, banks, insurance companies, all these sort of companies, stock exchanges, stock brokers, listed companies across Asia, they all can benefit from this.
Speaker: Not only that, if you then put that kind of a macro hat on, it also means that more money in the region is being invested in stock markets.
Speaker: So the Asian stock markets become less and less vulnerable or less and less reliant on capital from outside the region, from your
Speaker: proverbial New York or London fund manager invest in Asia.
Speaker: No, it is the regional investor, the Asians that buy Asia.
Speaker: So you get a re-channeling of savings across the region as well.
Speaker: So Fred, we've spoken about shrinking populations, female labour participation rates, ageing and how that changes consumption, but also savings patterns.
Speaker: So my question to you is, is demographics destiny?
Speaker: Harold, you put me on the spot here, but as an economist, I have to say demographics isn't destiny, but at least it shapes destiny.
Speaker: And what we mean by this is that these are very powerful forces that we have to take into account.
Speaker: But just because working age populations are slowing,
Speaker: doesn't necessarily mean that economic growth needs to slow all that much because as we discussed we can see a rising female participation rate we can improve human capital that offsets some of these trends.
Speaker: Conversely, just because say people save more as they approach retirement
Speaker: doesn't mean that growth will benefit if the institutions don't exist that channel these savings into productive investment.
Speaker: So the institutional framework still matters to capture and to amplify some of these demographic trends.
Speaker: But I would say, of course, demographics are some of the key, key driving forces we often tend to overlook, unfortunately, because we're so riveted by the headlines of the day.
Speaker: And these underlying forces are quietly and perceptibly working the background.
Speaker: But cumulatively, they, of course, have a major impact.
Speaker: But I would imagine for companies and for investors to look more specifically at sectors, it's just as important, isn't it, Harold?
Speaker: Yeah, Fred, I can't agree more.
Speaker: We in markets very often get tied up in what happens at the moment, but these are things that shape markets, savings, consumption, and these sort of things over the longer run.
Speaker: And I think very often in times when there's a lot of volatility in markets, it is very good to step back and look at these things because it gives you a sense of certainty.
Speaker: We will move there.
Speaker: We will age.
Speaker: We will have fewer people.
Speaker: And from there on, you can build.
Speaker: And I think for me as a kind of market strategist,
Speaker: Demographic shapes destiny, as you say.
Speaker: And politicians and governments need to work with that.
Speaker: We have lower birth rates across the regions, a lot of comments on how negative that is.
Speaker: We have fewer people around, but we just need to shift societies.
Speaker: If we want, for example, that these birth rates go higher, we need to make sure that...
Speaker: women feel comfortable with having more children.
Speaker: So for example, childcare becomes very affordable and it's easy to integrate that with working.
Speaker: So societies need to shift and adjust to this.
Speaker: And so do companies.
Speaker: It means that, if you want to say very bluntly, if you're selling baby diapers, you're going to have a problem.
Speaker: But if you're selling cruise ships and healthcare services or financial services, you're probably in a better position.
Speaker: So you need to think about how you're going to reposition your company, your business strategy,
Speaker: in order to benefit from that.
Speaker: And that might be as easy like, hey, if there's more older people that have a bit more money to spend, I want to sell craft beer instead of the commodity beer or try to tap into financial services that these people need.
Speaker: You need to rethink your own business strategies.
Speaker: And of course, then it's up to investors to identify who these companies are and which ones are not.
Speaker: And I think importantly, we have to recognize that these changes are occurring right now.
Speaker: They're not occurring in 10 years or 20 or 30 years.
Speaker: These changes are happening this year, next year, the following year.
Speaker: Exactly.
Speaker: That's why we started off with destiny has arrived.
Speaker: And on that profound note, we're going to have to wrap up this week's show.
Speaker: Indeed, thank you very much for joining us.
Speaker: It's been a great discussion and we'll be back again soon with the next one.
Speaker: Take care.
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