The developing world is expected to grow at around three times the pace of the developed world for the foreseeable future. This will have a profound impact the region’s development. It will affect, among other things, economic growth, consumer demand and the region’s financial services. Investors must take note of the opportunities that will arise. Demographic Transition …
Juergen Lanzer, Portfolio Manager, Schroders Global & International Equities Team
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By 2050, the world’s population will have grown by over two billion, with 98% coming from emerging markets. 85% of the world’s population will be in countries that are currently considered ‘less economically developed’ so, for every Western consumer, there will be six in Asia, Africa or Latin America.
Yet emerging market populations are growing much slower than previously, as birth rates fall in all but the most war-torn countries. Population growth is largely being driven by life expectancy, which in the developing world has risen from 41 years to 65 since 1950, and is expected to reach 75 by 2050. This accelerated transition took two centuries in the developed world.
Nevertheless, most emerging market populations will continue to grow faster than the developed world for several decades. Russia is the big exception: its population began to shrink in the late 1990s and will fall by 30 million (over 20%) by 2050. Even more unusually, this is not due to a particularly rapid fall in fertility, which was already relatively low 50 years ago, but an unprecedented worsening of average life expectancy since the 1960s.
“…a growing working age population share is closely correlated with per capita GDP growth, explaining over a quarter of the economic miracle in East Asia.”
Another result of the demographic transition is rapid ageing, more commonly associated with the developed world. Several countries in emerging Asia and Eastern Europe will be among the oldest in the world by 2050. China is ageing even faster than Japan, and will soon have higher dependency than the US or UK.
However, in most emerging markets population maturation is more relevant than ageing. Falling fertility initially results in fewer young dependents and a rise in the proportion of working age population. Countries reach a ‘sweet spot’ when this proportion is maximised, before falling numbers of children are outweighed by rising numbers of old people. As shown below, Russia and China will soon pass this point, followed by Latin America, India and (much later) Africa.
Studies show that a growing working age population share is closely correlated with per capita GDP growth, explaining over a quarter of the economic miracle in East Asia. This ‘demographic dividend’ is one reason the developing world is expected to grow at around three times the pace of the developed world for the foreseeable future. For China, the end of cheap labour will put downward pressure on economic growth, but its working age population is still the largest in the world, and its growth rates will remain among the fastest.
Population growth and economic development will drive rising demand for a range of consumer goods and services. In general, as income increases, consumption shifts away from necessities, especially food, towards discretionary purchases including education and leisure. Recreation and culture account for over 10% of spending in the developed world, compared to 6% in China, 2% in India and less than 1% in much of Africa. Health spending will also rise, driven by both income and rapid growth in the number of elderly.
Another beneficiary of population maturation is financial services. The number of prime savers (aged 40-65) in emerging markets is expected to more than double; triple in Africa and the Middle East. This will drive deposit growth, providing funds for lending, and should boost demand for life insurance and mutual funds, where current penetration is very low. Saving is already high in emerging markets due to the lack of social security, health or pensions, which is unlikely to change given the costs involved. Governments are most likely to mandate or incentivise occupational or private pension plans, which would benefit life insurers and asset managers in particular.
The views and opinions contained herein are those of Azad Zangana, European economist, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. For professional investors and advisers only. This document is not suitable for retail clients. This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Investment Management Ltd (Schroders) does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Schroders has expressed its own views and opinions in this document and these may change. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions. Issued by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA, which is authorised and regulated by the Financial Services Authority. For your security, communications may be taped or monitored.
Source: ETFWorld – Schroders