How this "dividend" is transforming ASEAN
Demographics is one of the "big picture" themes that has a massive impact on the world's economic growth patterns. And it's going to be one of the many sources of> READ MORE
Demographics is one of the "big picture" themes that has a massive impact on the world's economic growth patterns. And it's going to be one of the many sources of> READ MORE
When consumers are feeling upbeat – about their income, jobs, and life – it should be good for the stock market. Or should it? Credit card company MasterCard> READ MORE
For many people, there’s no place like home. It’s familiar and comfortable. But for your portfolio, staying at home means taking on a lot more risk than you> READ MORE
Robo-advisors are making a rapid push into Asia. When we last wrote about robo-advisors – which are online wealth management services that use mathematical> READ MORE
Demographics is one of the “big picture” themes that has a massive impact on the world’s economic growth patterns. And it’s going to be one of the many sources of growth for parts of Southeast Asia in coming decades.
(In coming days we’ll tell you about a way to invest in ASEAN’s powerful demographics… stay tuned.)
Humanity is in the middle of the biggest demographic shift in history. Population growth is being forecast to explode in many African countries – and decline in Europe and several other major regions. Broadly speaking, economic growth is a function of the number of workers, and their productivity. Shifting demographics in part drives economic growth.
As we’ve recently discussed, Asia’s demographic future is a mixed bag. With its ageing population and low fertility rate, Japan is having some severe problems that will affect its economy for a long time.
China’s population is also expected to fall by 2 percent by 2050. And according to think tank Brookings Institution, the share of China’s working age population is declining rapidly, which will hurt future economic growth.
Southeast Asia, on the other hand, has much more reason to be optimistic. Demographics in the Association of Southeast Asian Nations (ASEAN) will likely boost the region’s economic growth over the next several decades.
ASEAN’s demographic dividend
ASEAN’s total GDP of US$2.43 trillion makes it the sixth-largest economy in the world. The region is also home to over 600 million people – more than North America or the European Union. It’s a rapidly developing region thanks in large part to its large working age population. Only China and India have larger labour forces than ASEAN.
Indeed, ASEAN has a higher than average proportion of working age adults – and it will likely stay that way until 2030. One estimate suggests that the working age population in ASEAN will account for 68 percent of the region’s total population by 2025 – up from less than 60 percent in 1990.
And as ASEAN’s working age population has increased, the share of its population that is too young or old to work – its dependents – has fallen. As a result, ASEAN’s dependency ratio, which measures the share of the dependent population against the working population, has been declining.
But ASEAN’s population growth has been slowing for the past 50 years. In 1965, annual population growth was 2.8 percent. By 1990, it had dropped to 2.1 percent. And last year, it was a mere 1.2 percent.
Looking ahead, the United Nations expects ASEAN’s population to rise from 633 million people in 2015 to 717 million in 2030, and to 741 million people in 2035, for average growth of 0.85 percent per year. That’s lower than the expected global growth rate of 0.98 percent during the same period – indicating lower fertility rates.
In many ways ASEAN is enjoying what’s called a demographic dividend. This describes how a population’s changing age structure can help boost economic growth. It usually happens when labour force participation rises and fertility rates fall, which is what’s happening in ASEAN right now.
With the labour force temporarily growing faster than the dependent population, there are more resources available for investment in family welfare and economic development. And when countries have a greater share of people who can work, save and pay taxes, the economy benefits. And it leads to an increase in growth in income levels that can last for decades.
The dividend won’t last forever
However, eventually a rapidly ageing population – since there are fewer babies and thus fewer young people – causes the share of the working-age population to decline. Then the dependency ratio begins to rise. When the population to labour force ratio rises, GDP per capita income starts growing more slowly.
But this is years away for ASEAN. The UN predicts that ASEAN’s dependency ratio will start to drop over the next few years, from 0.48 in 2015 – meaning that for every 100 working age people, there will be 48 dependents – to 0.47 by 2020. This is well below the global average of 0.54.
However, the ratio will begin to rise by 2030, and then accelerate to reach 0.59 by 2035, which will be in line with the rest of the world.
Singapore and, to a lesser extent, Thailand, will drive much of the increase in the ratio, thanks to their older populations. According to 2016 estimates, other than Singapore, Thailand and Vietnam, the median age of ASEAN countries – that is, the age at which have the population is older, and half is younger – is less than 30:
This suggests that there are still lots of young, working-age adults in the region, especially when compared to other parts of the world. In the U.S., the median age is 37.9 years. In China, it’s 37.1 years. And in Japan, it’s a much older 46.9 years.
The remaining ASEAN nations will see only modest rises in dependency. But the “demographic dividend” for the region is expected to end by around 2030. By this point, the Asian Development Bank estimates, 10.8 percent of the ASEAN population will be above 65, much higher than the 6.8 percent recorded in 2010.
ASEAN’s demographic dividend doesn’t necessarily guarantee a boost in economic growth. A country can blow their demographic dividend with the wrong social and economic policies.
And since ASEAN members have some major political differences, favourable demographics may not benefit every ASEAN country to the same degree.
That being said, trade liberalisation and increased ASEAN worker mobility will help the region capitalise on its demographic dividend. And that makes the future success of the ASEAN Economic Community even more important.
For the next 15 years or so, demographics are going to play an influential key role in boosting ASEAN’s economic health. Shortly we’ll tell you about a way to invest in this trend that could dramatically increase the value of your portfolio – so stay tuned.
When consumers are feeling upbeat – about their income, jobs, and life – it should be good for the stock market. Or should it?
Credit card company MasterCard regularly conducts a consumer confidence survey throughout 17 Asia-Pacific region countries, in which it polls consumers about their feelings on five economic factors including the economy, employment and income, the stock market and their quality of life.
In the latest survey, consumer confidence in both Singapore and Hong Kong scored in the low-30s – with 100 being extremely optimistic, and zero being darkly suicidal. The most optimistic countries – markets where people are buying stuff, hiring people, and doing other things that will boost the economy – were Myanmar (with a hard-to-believe score of 99.8) and India (97.6).
The last time consumer confidence in Singapore and Hong Kong was so low was in June 2009, near the end of the global financial crisis. Confidence levels have fallen more than 10 points since the end of 2015.
In the same way that strong economic growth is not necessarily good for the stock market, though, happy consumers are also not good for the stock market. And (similar to economic growth), lower consumer confidence is often a signal that stocks are about to head higher. Consumer confidence and stock markets tend to bottom out at about the same time.
The following chart shows the performance of Singapore’s Straits Times Index (STI) compared to Singapore’s consumer confidence index.
Since the turn of the century, a fall in consumer confidence has preceded a recovery in the STI a number of times. The consumer confidence index previously hit lows in December 2002, June 2009, December 2011 and December 2013. And on every occasion, the market started to rally (to varying degrees) just before, or at about the same time, that consumers were feeling the least optimistic.
(This is just one reason to consider buying Singapore shares… see our report here about other reasons to be upbeat about the STI.)
Hong Kong shows a similar trend. Pessimism in Hong Kong has in recent years preceded a rally in the Hang Seng.
Why is this? In general, factors like consumer confidence and economic conditions are “priced in” to the stock market. So by the time consumers are upbeat and optimistic, stocks have already moved up, and are poised to fall (this doesn’t bode well for India’s stock market). On the other hand, low consumer confidence suggests that shares are in a good position to rise.
Remember, share prices don’t reflect what’s happening right now. They reflect what investors think is going to happen. So it’s possible to make money in stocks during normal times. But the biggest gains come after the economy has been doing poorly.
Over the long term, consumer confidence is important for share prices. But in order for confidence to rise, it has to be low.
The following chart illustrates this cycle of emotions. It shows how growing optimism often means markets are at more risk of a fall. But the point of maximum pessimism often presents the best buying opportunities.
Cycle of Investor Emotions
If the latest consumer confidence results are indeed a sign of “despondency,” it also suggests that Singapore and Hong Kong investors are facing the point of “maximum potential opportunity.”
Markets can always go lower and consumers can get more pessimistic. But using history as a guide, investors in Singapore and Hong Kong should be feeling very optimistic about the prospects of the local stock market.
For many people, there’s no place like home. It’s familiar and comfortable. But for your portfolio, staying at home means taking on a lot more risk than you might realise.
It’s natural to want to invest at home. If you live in Singapore, for example, you see the Singapore’s Straits Times Index (STI) quoted every night on the news. You drive by the DBS building every day. Jets bearing the Singapore Airlines logo fly above you, and you shop at a CapitaLand mall. Investing locally means investing in what you know – which, as we’ve written before, is generally smart.
Everyone is guilty of home country bias
So it’s not surprising that most people invest mostly in their home market. Due to “home country bias,” the average American with a stock portfolio has 79 percent of her money in U.S.-listed stocks. Investors in Japan put about 55 percent of their money in Japan-listed stocks. People in Australia have two-thirds of their portfolio in local shares.
That might be what they’re comfortable with. But from a portfolio diversification perspective, it’s like juggling live dynamite.
As the graph below shows, American stocks account for only 51 percent of total global market capitalisation (that is, the value of all stock markets in the world). So American investors are a lot more exposed to U.S.-listed companies than – based on a breakdown of the world’s markets – they should be. Japanese investors are even more lopsided in their home preference – Japan accounts for only 7 percent of the world’s stock market. And Australians put 66 percent of their money into their own market – which is just two percent of the world’s markets.
And Singapore’s stock market is only 0.4 percent of the world total, but Singaporeans invest about 39 percent in domestic equities. Home country bias means most investors have too much exposure to their local market.
Why do investors do this? Besides investing in what they know, studies have shown that domestic investors tend to be more optimistic about the local economy than are foreign investors. Also, local investors face fewer tax hassles when buying domestic shares, and less foreign currency risk. Investors often trust companies and stocks outside their borders less than they do those in their own country (even if the “foreign” market is bigger and less volatile than the local market).
How geographic diversification helps
A portfolio that isn’t sufficiently diversified is riskier than one that is well diversified. And geographical diversification is important, as we showed here. Since different markets outperform at different times, even though they all tend to move in the same general direction, having money invested in a range of geographical markets can boost your returns.
Make sure to assess the home bias of your own portfolio. If you have a severe case of home country bias, it would be wise to consider making a few adjustments to move some of your money elsewhere. Your portfolio can only benefit from being a little more cosmopolitan.
An easy, inexpensive way to diversify globally is to use ETFs. There are a variety of ETFs available on the Singapore and Hong Kong Exchanges that give you exposure to specific countries, or the entire global market. For example, in Singapore you can buy the Lyxxor UCITS MSCI World Index ETF (code: H1P). This gives you exposure to 23 different countries and most of the world’s biggest publicly-traded companies with one investment.
Robo-advisors are making a rapid push into Asia.
When we last wrote about robo-advisors – which are online wealth management services that use mathematical formulas to develop, maintain and rebalance your investment portfolio – in January, there were only a handful of Asian robo-advisor firms. This included Hong Kong’s 8Now! and Singapore-based private banker Infinity Partners. However, both of those companies serve narrow client bases. 8Now! only works with wealthy investors in Hong Kong and Japan, and Infinity mostly serves U.S. expats in the region.
Six months ago, Asia’s smaller retail investors didn’t have many options. But that’s starting to change.
Smartly, a Singapore-based robo-advisor, expects to launch next month. The start-up will allow for investments of as little as $50. It’s also developing an educational platform to help clients gain a better understanding of investing.
Smartly promises low fees compared to the 2-3 percent traditional advisors in Asia normally charge: 1 percent annually for accounts under $10,000; 0.7 percent for $10,000-$100,000 accounts; and 0.5 percent for $100,000-plus.
Robo-advisors can charge fees this low in part because they use mathematical formulas called algorithms—not costly, biased, and emotionally driven human advisors—to manage your portfolio. Also, robo-advisors often allocate money to ETFs, which generally have much lower fees than the investment funds that traditional advisors in Asia normally use.
(Please see our previous article on robo-advisors for a more detailed explanation of how they work.)
Robo-advisory options for Asian businesses are also growing. Bambu, a business-to-business (B2B) robo-advisor, launched in Singapore in April. It’s partnering with global giants like data company Thomson Reuters to offer its robo-advisor services to businesses of every size and type – even if they have smaller accounts than traditional wealth managers usually accept.
The recent growth in Asia is impressive. But it may be just a taste of what’s to come, if what’s been happening in the U.S. and Europe is any indication.
Giant investment firms like Blackrock Inc. (the world’s biggest investment management company), Invesco, Goldman Sachs and others have all recently spent hundreds of millions of dollars to buy existing robo-advisor companies in the U.S.
Other major banks and investment houses are opting to develop their own online services in-house. Morgan Stanley and Bank of America are designing their own technologies, and German banking giant Deutsche Bank introduced its own robo-advisory in December.
So far, the U.S. and Europe have dominated the robo-advisory space. That makes sense… the 2007-09 financial crisis hit these regions much harder than it hit Asia. And the fallout opened up opportunities for innovative, technology-driven solutions. The crisis also exposed the excessively high fees U.S. and European banks and brokerages charge.
While the rules for setting up an investment advisory company are similar between U.S. states, as well as member countries of the Eurozone, they can vastly differ from one Asian country to the next. So in Hong Kong, for instance, regulations still require some degree of human involvement when providing wealth management services. This has limited Asia’s development of automated investment services compared to the west.
Younger retail investors – who already manage the rest of their financial lives online – have driven a growing interest in robo-advisors. But they are also catching on with older generations. They all like the fact that they can invest smaller amounts than traditional asset managers normally require and that there are no biased investment decisions. And, as mentioned, the fees are much lower. Lower fees make a big difference over time.
Traditional financial advisors are increasingly concerned about the low fees robo-advisors can charge. That’s why they’re developing their own automated platforms or strategically acquiring robo-advisor “fintechs.” It means they can continue to compete. And it attracts new retail investors, creating more opportunities to form traditional wealth management relationships down the line… and ultimately, more opportunities to charge heftier fees.
Some firms are even offering “hybrid” services: robo-advisories with representatives available to answer questions, for customers who want some human interaction in the investing process.
Given the head start U.S. and European companies have in this space, many Asian robo-advisories will likely partner with large foreign financial institutions to get off the ground. For Asia’s investors, that could mean swift growth over the next few months.
Blackrock Inc. is looking to enter the Asian robo-advisory market. Kevin Hardy, the head of BlackRock Singapore, says the company is in talks with “organisations that are looking to establish a footprint in the region using robo-advisory technology.”
Link Pacific Advisors also sees the growth potential for robo-advisors in Asia. The firm aims to connect high-quality fintech companies from overseas with clients and strategic partners in the region. Justin Balogh, Link Pacific’s representative director, thinks Asia’s wealth management opportunities are the fastest-growing in the world.
For now, the U.S. and Europe still dominate the robo-advisory industry, both in terms of the number of investment firms and amount of assets under management. But Asia is picking up speed. Five of the six largest internet companies in Asia have now entered the wealth management market.
Hong Kong’s Tencent, for example, is considering offering a wealth management service through its popular WeChat app. Capitalising on the robo-advisor boom is the next logical step for Tencent and other companies like it.
With start-ups like Smartly catering to entry-level retail investors and big hitters like Blackrock showing interest in the Asian market, robo-advisors are set to play an increasingly critical role in Asia’s wealth management industry.
As more robo-advisories move into Asian markets, more of the region’s investors will see the substantial difference one or two percentage points makes in the fees they have to pay. This could lead to another string of mergers, acquisitions and new partnerships like those happening in the U.S. and Europe right now.
While the robots haven’t taken over Asia quite yet, they are certainly on their way. And this is good news for investors.
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