DEMOGRAPHICS and THE ECONOMY

DEMOGRAPHICS and THE ECONOMY

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What is the link between the population and the economy?

For many years, it was believed that a high population was a liability. However, a country's economic growth is just simply the function of the population and the productivity of that population. It is a fact that as a country becomes richer, the population has fewer children, and hence the slowdown of the economy starts unless productivity rises.

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JAPAN

????????Japan was the first country to acknowledge its ageing population. It is estimated that by 2060, there will be one elderly person for each working individual. It is also estimated that in this period the population will shrink. Women in the labour force are one of the highest in the world, making up a part of the shortfall.?

?????????Japan is the world's 3rd largest economy. They are an extremely disciplined race, work long hours, and hence productivity is high. However, immigration into Japan is minuscule, and discouraged - unless in the highly skilled sector. Japan has had a long time to work on the problem and is extensively using humanoid robotics, as?the robots have no cultural?differences and do not carry the baggage of negative historical memories (e.g. Koreans and Chinese) Robots also help perpetuate the myth of Japan as a homogenous nation.

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CHINA

????????For 42 years they had a one-child policy which is impossible to reverse overnight. Every couple has 8 grandparents and only 1 child to support them. China stopped the one-child policy in 2016, but it has not resulted in a meaningful uptick in the population. In 2022, China's population fell by 850,000 for the first time since the 1960s. The current birth rate is just 6.77 per year per 1000 people, which will compound China's problems for years. The working population peaked in 2010 and has been rapidly declining since then - and is expected to fall?by 40% in the next 30 years.?The number of seniors is likely to surpass the working-age population by the 2080s.

????????The answer to China's demographic problem is to achieve higher productivity, which is going to be challenging: Just to provide for seniors in 2050 at the same level as today, productivity would have to go up by 28%, which is a massive challenge. The previous motors of the rapid growth in productivity in China were:

?(a)?Urbanisation

?(b)?Education?

?(c)?Globalisation

?(d)?Easy capital?

?????All of which are now issues.?China is haunted by the specter of the "Middle-class trap", where developing countries emerge out of poverty only to get stuck before they get rich. We need to see what China can do to overcome this looming problem

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USA?

???USA too has slowing population growth. The Fertility rate peaked in 2007 and has been falling quite rapidly to an average of 1.61 births per woman.?By 2030 most of the baby boomers would have retired, which would put a strain on Social Security. The super-sized Boomer generation has spent decades accumulating assets in preparation for retirement, and now they will be drawing down on these assets. There will be a triple whammy, which will affect economic growth:

????-?Productivity will go down as the boomers tend to be upper management and very productive.

????-?Consumption will go down as they will spend less in retirement.

????-?Savings will fall and hence investible surpluses.

The underlying demographic forces are slow-moving and inevitable. This is coinciding with high inflation also fuelled by global supply constraints and excessive pandemic-era stimulus.

??????????One solution to the demographic problem could be immigration.?On average, approximately 1 million immigrants have come to the United States each year for the past 25 years. The foreign-born population is younger and more likely to be hard-working than native-born Americans.?Immigrants also tend to be more mobile and quickly move to fill in gaps in the workforce. It is thought that the 2% average growth in the US cannot happen without immigration.

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INDIA

?????In the year 2000, the bulk of the population were either old people or children - neither group?contributed to the productivity of the country.?However, the working-age population has been increasing since 2000, although the rate of increase is slowing a bit now. Hence until 2050, India's working-age population will go on growing.

?????Productivity would improve as the following happens:

1.??Networks improve - 5 G and good telecommunication, building roads, railways. ports and airports,?

2.??New Education Policy to make students more employable.?

3. Production-linked incentives to improve manufacturing and not be restricted to just assembling when bringing technology into the country.?

??????Last year we overtook China to become the most populous country. Starting in 2030, India will have the highest working population in the world - contributing about 30% of the working population, which?would also be 70% of India's total population

??????Returns are always made on growth. Growth at a country level is a function of population and productivity. To be an investment destination Growth has?to be applicable with scale. As we are a US$ 3.5 tn economy and the 5th largest in the world, and if we grow at 6-7%, it makes a difference to?world?growth.?Before Covid-19, the world’s GDP was US$ 90 tn. In a good year, the growth would be 3% - US$ 2.7 tn. Out of this US$ 1.8 tn was attributed to the USA and China. That is why the USA and China are investment destinations. India, before Covid-19, was 16% of the world's population and contributed 4% to the world's growth. However, in 2022 we have contributed?20% to the world's growth, where the world added just US$ 1.5 tn. In the next 10-15 years India will be amongst the largest contributors to the economic growth of the world.?That means we will be amongst the largest consumers market, the biggest labour pool, and the biggest investment destination. Hence India is entering a golden period.?

???????What is most important is that we have a per capita income of just US$ 2400, which will double in the next 8-9 years. GDP doubles in 12 years, but the population does not grow as fast so per capita doubles much faster.?As the per capita income doubles, certain sectors will grow exponentially -?Consumer discretionary (currently 30% of China's stock market), savings, investing, and automobiles.

????????India has always been expensive. In the last 15 years and also in the last 5 years (and that too after the rally in China of last quarter) in dollar terms China's stock market returns have been negative. In the same period, after the US, in dollar returns the best market has been India. This is because we are a democracy, well regulated - protecting minority interests, lowest weightage of State-owned companies, and have better visibility of earnings - not only economic growth.?

?????????Listed companies?in the US in 2000 were 3500. In the last 25 years market capitalization has gone up 3X. - but the number of listed companies has become half.?Alpha has gone to the private market in the US due to cross-overs,?buybacks, mergers, etc.?India's equity market is different. We have more than 7000 listed companies and the bulk of the economy is not even reflected on the stock exchange.

??????????Capital is a function of opportunity. We were not growing between 2015 to 2019, as there were structural changes and interventions in the market. 2010-20, EPS growth was 3-4% in rupee terms and negative in dollar terms. and so, the Government had to lead the effort.?All that is now behind us and India is poised for exponential growth.

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EQUITY MARKETS

??????The market has been showing a lot of volatility in 2023. Equity market movement depends on:

????(a)?Fundamentals

??????????With this quarter's earnings, 50% of the earnings were flat, 30% were below expectations, and 20% were above expectations. Hence earnings as a whole were flat and not too interesting.?

????(b)?Sentiments

???????????Geo-political?tensions appear to be rising in the Ukraine / Russia conflict. In India, the Adani problem too has dented sentiment.?

????(c)??Liquidity.??

???????????Global liquidity appears to be tightening and rising interest to control Inflation is not over yet.??

Hence, with all the drivers of the equity market not too positive, in the short term, equity will be subdued this year, giving periodic opportunities to enter to take advantage of the?Golden Decade?of India's growth story.

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DEBT MARKETS

??????With rising inflation, the interest rates will also rise, but that is likely to be limited and hence in the short term there may be some volatility in the debt market too. If you are looking at a replacement for Fixed Deposits, over the next three years (where it becomes tax efficient), the coupon rate is attractive and in addition, capital gains are probable as well.

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GOLD/SILVER

???After a 3-month bull run-up, gold and silver are now consolidating. As long as Governments continue to look for an alternative to the Dollar,?the Central banks will keep on increasing their Gold/Silver holdings.?