CONTRIBUTORS
Kim Catechis
Investment Strategist,
Franklin Templeton Institute
Karolina Kosinska, CIPM
Analyst
Franklin Templeton Institute
Lukasz Labedzki, CFA
Senior Analyst
Franklin Templeton Institute
Introduction
In our “Deep Water Waves” publication,1 we identified several powerful, connected and long-duration factors that will have a significant impact on investment returns over the next decades. One of these is the Demographic Wave. Its impact is a distinct aging of the populations of some countries and high fertility rates and young populations in others. Those countries that have been driving global economic growth over the last generation are aging fast, creating productivity challenges. Those with young populations are almost invariably struggling to create jobs and give themselves a chance to benefit from their youthful population. This mismatch serves to exacerbate the impact of a combination of social, economic, geopolitical and governance pressures.
This paper is a derivative of “Deep Water Waves” and identifies the economic, political and investment implications for countries in each of the four stages of the demographic dividend. It uses the analysis of the structural positioning of 110 countries (covered by our proprietary Country Risk Framework) to outline potential policy direction and the signposts for investors to watch for. Growing demand for credit and a more constrained access to financing will play defining roles, along with the impact of climate change in the next 20 years.
Executive summary
Every country will have a particular economic and social structure because of its history, geography, governance and past policy choices. Demographics constitute a powerful driver of policy and can force governments to move in directions that seem to offer short-term fixes but can have long-lasting repercussions. Using the World Bank concept of “demographic dividend,” it is possible to enhance the analysis of a country’s structural advantages and constraints. Such analysis serves to identify a series of measures that could improve its positioning, which can constitute a list of “signposts” for investors to look out for. Further, we believe this paper can be useful in setting more accurate country risk premiums for investors.
The main points are these:
- For investors, demographics are a driver of country risk, and they can impact productivity, economic growth, sovereign financials and debt ratings.
- The “demographic dividend” is a transitional moment which is not repeatable. Hence, the importance of preparation. If the appropriate policy mix is in place beforehand (education, healthcare, infrastructure and governance), the positives of the transition can be extended and intensified.
- As mortality declines, policies to facilitate family planning and slow down fertility rates are especially beneficial. These factors also have positive impacts on the health of women and their participation in the workforce.
- The age structure of a population appears to be the most powerful driver, but for governments it also facilitates policy planning.
- As countries begin to experience the demographic dividend process, they will be able to continue investing in their economic development. To maximize the benefits of an expanding workforce, and to accommodate the attendant social pressures, it is an advantage to be open to trade and to have flexible labor markets.
- Targeting the poor with microfinance and pro-inclusion initiatives like “bolsa familia”2 helps to prepare for the future contraction of the workforce.
- Geoeconomic imperatives drive the return of the political economy, forcing supply chain reconfiguration and making the fight for foreign direct investment (FDI) less fair.
- The promise of technologies such as artificial intelligence (AI) appears primarily focused on areas that will extend life by way of research and development (R&D) in pharmaceuticals and biotechnology in general. This is clearly a net positive, but governments need solutions for other challenges, such as the business of servicing an older population with a declining workforce.
This paper covers the four stages of demographic dividend and features four country case studies—Angola, India, China and Italy.
Endnotes:
- Source: “The Sovereign Debt Wave.” Franklin Templeton Institute. August 16, 2021.
- A Brazilian government program offering low-income families conditional cash transfers, credited with reducing poverty and improving educational attainment.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Equity securities are subject to price fluctuation and possible loss of principal.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Investments in companies in a specific country or region may experience greater volatility than those that are more broadly diversified geographically.
Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.