Investors seeking to capitalize on a single country's growth should consider that an expanding, robust economy needs active participants to fully maximize a country's potential. With developed economies suffering from an aging population, there might be better opportunities in emerging market economies and exchange traded funds.
"The graying of the developed world is hitting an inflection point and is forecast to accelerate," writes Ross Koesterich, Managing Director, iShares Chief Investment Strategist, in a research note. "An unprecedented shift in demographics is likely to impact everything from economic growth to equity multiples."
In the U.S., the unemployment rate sits at 8.2%, with the aging workforce opting for early retirement and no new baby boom to replace them, Koesterich believes that the country's economic growth will begin to slow. It is estimated that in the U.S., the median age will rise from 35.5 in 2000 to almost 40 by 2025. Additionally, the ratio of working age Americans to retirees will drop from about 5-to-1 to 4-to-1 over the next decade and 3-to-1 by 2030.
Meanwhile, emerging market countries, like India, Brazil, Indonesia, Mexico and the Philippines, have a large young workforce relative to the percent of those over 65. For example, Brazil and Mexico have favorable demographics, with the percent of the population under 15 at 3.5 and 3.8 times that of the percentage over 65, respectively. In Indonesia, the ratio is 4-to-1, in India it is almost 5-to-1 and in the Philippines the ratio is at 7.5-to-1.
In contrast, in the U.S., the percent of the population under 15 is 1.5 times that of the percentage over 65. This is still much better than any other developed country, notably Japan where the ratio is 0.5-to-1, or the old outnumber the young two to one. The Eurozone has a 0.90 ratio of under 15 to over 65.
Without a surge in productivity through technological advances or a major shift in immigration policy, Koesterich projects a steady decline in productivity from developed countries. As such, he suggests that investors should allocate more toward younger emerging markets to help mitigate the impact of aging populations.
Country-specific ETFs that follow young economies include:
- iShares MSCI Brazil Index Fund ETF (EWZ)
- iShares MSCI Mexico Index Fund ETF (EWW)
- iShares MSCI Philippines Investable Market Index Fund ETF (EPHE)
- WisdomTree India Earnings Fund ETF (EPI)
- Market Vectors Indonesia Index ETF (IDX)
Max Chen contributed to this article.