Capturing the ‘demographic dividend’ in emerging market debt
- 26 May 2021 (5 min read)
Due to advances in medicine and greater knowledge of how factors such as nutrition impact health, people can look forward to longer lives. Overall, the average population age at a global level is rapidly increasing. However, there is significant variation across regions. For instance, Europe is the oldest continent with an average age of 40, whereas in Africa and South America the populations are still quite young1 .
Many emerging markets have a younger average population, which has a number of key advantages that are likely to give them greater potential for economic growth going forward. For a region such as Africa, which has a median age of just 18, investing in health and education should benefit from the continent’s huge younger generation and capture the potential economic payoff, referred to as the ‘demographic dividend’.
Another advantage is there is a greater percentage of people of working age, and therefore a larger workforce per capita relative to developed countries. The chart below shows how we are now past the turning point where the percentage of working age population in emerging markets has exceeded that in the developed world – a trend which is only expected to accelerate.
Looking closer at some key emerging markets, the working age population of India is expected to rise to almost 70% between now and 2050, while Nigeria’s is predicted to steadily rise to over 65% by the year 2100.
Potential benefits for fixed income investors
We believe that a larger working population raises a country’s prospects for economic growth with greater potential for industries to expand. Companies can produce goods in larger numbers, while there is more labour available for key infrastructure projects. We could see this greater potential for growth in younger emerging markets countries start to draw more capital away from ageing developed countries, potentially shifting the global distribution of economic power. An increase in Foreign Direct Investment (FDI) could significantly improve the debt sustainability of emerging markets, potentially increasing their long-term credit quality and stability of bond markets with less reliance on issuing debt to finance development. FDI flows represent a show of confidence and an extended commitment to a country that greatly improve its prospects for growth.
Another key benefit of having a lower average population age is that it is likely to be associated with lower healthcare costs. This gives emerging market countries greater ability to spend their fiscal resources on projects with greater potential to drive their economies forward, with Asia in particular forecast to generate significant growth, as per the chart below.
In addition, an ageing population implies more people claiming pension benefits with fewer to pay income taxes, which may require higher tax levels for the workforce to meet the funding requirements. Avoiding this would give workers in emerging markets a greater proportion of their wages available for consumer spending and to support domestic businesses.
We have started to observe greater demand in areas such as e-commerce, real estate and banking, and believe corporate bonds in these consumer sectors offer attractive long-term value. We expect that strong demand for these sectors should lead to more stable businesses and improving credit quality. Latin American e-commerce companies such as Mercado Libre2 and B2W3 have come to the market in the last six months and the bonds have seen strong demand.
Another key advantage of having a younger population is that they generally have greater levels of mobility. This makes them more likely to migrate to cities from rural areas in search of better-paying jobs and higher standards of living, and this urbanisation is closely associated with economic development. It helps to produce a more concentrated workforce, while allowing for more efficient uses of energy and resources. This trend is expected to drive the rise of megacities in emerging markets.
Changing demographics are an important part of the macroeconomic environment for investors in emerging markets debt. Better prospects for economic growth can often mean more stable bond markets, less fiscal strain in emerging markets countries and potential new opportunities in the corporate bond market. And as fixed income investors look for returns, we could potentially see interest in emerging market debt grow even faster.
- U291cmNlOiBJbnN0aXR1dGUgZm9yIEhlYWx0aCBNZXRyaWNzIGFuZCBFdmFsdWF0aW9uIChJSE1FKQ==
- TWVyY2Fkb0xpYnJlIEV5ZXMgRVYgRmxlZXQgR3Jvd3RoIEFmdGVyICQxLjEgQmlsbGlvbiBCb25kIFNhbGUgLSBCbG9vbWJlcmc=
- TG9qYXMgQnJhemls4oCZcyBCMlcgcHJpbnRzIGRlYnV0IGp1c3Qgd2lkZSBvZiBwYXJlbnQgfCBHbG9iYWxDYXBpdGFs
Not for Retail distribution
This document is intended exclusively for Professional, Institutional, Qualified or Wholesale Clients / Investors only, as defined by applicable local laws and regulation. Circulation must be restricted accordingly.
This promotional communication does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.
Due to its simplification, this document is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee that forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this document is provided based on our state of knowledge at the time of creation of this document. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient. This material does not contain sufficient information to support an investment decision.
Before making an investment, investors should read the relevant Prospectus and the Key Investor Information Document / scheme documents, which provide full product details including investment charges and risks. The information contained herein is not a substitute for those documents or for professional external advice.
The products or strategies discussed in this document may not be registered nor available in your jurisdiction. Please check the countries of registration with the asset manager, or on the web site https://www.axa-im.com/en/registration-map, where a fund registration map is available. In particular units of the funds may not be offered, sold or delivered to U.S. Persons within the meaning of Regulation S of the U.S. Securities Act of 1933. The tax treatment relating to the holding, acquisition or disposal of shares or units in the fund depends on each investor’s tax status or treatment and may be subject to change. Any potential investor is strongly encouraged to seek advice from its own tax advisors.
Past performance is not a guide to current or future performance, and any performance or return data displayed does not take into account commissions and costs incurred when issuing or redeeming units. The value of investments, and the income from them, can fall as well as rise and investors may not get back the amount originally invested. Exchange-rate fluctuations may also affect the value of their investment. Due to this and the initial charge that is usually made, an investment is not usually suitable as a short term holding.