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Demographic Shifts: How Aging Economies Impact Emerging Market Assets

Jason Hsu, PhD

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This following article was first published to
Jason Hsu’s LinkedIn newsletter, The Bridge.
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Famed French sociologist and philosopher Auguste Comte said that demography is destiny. Indeed, aging demographics is one of the most predictable macro challenges for humanity—the ultimate slow-motion train wreck. The world is getting older. Developed market workers are retiring in ever larger numbers. However, because 1) demography is exceedingly slow moving, and 2) its impact seems to manifest only in a distant future, investors have been no worse off ignoring this impending crisis.


However, I argue in this article that this much-ignored distant future is upon us. I believe it is high time that we pay attention and plan accordingly. Much has been said about the developed market’s aging population and its impact on GDP growth. Slowing growth in developed markets is in part caused by its dwindling workforce. The easy and superficial conclusion would be that EM economies with their younger population will drive future global growth; thus, EM would present a wonderful investment opportunity. But let’s not leave it there.


In this article, I will delve deeper into an analysis on demography. Specifically, exploring the changing dynamics of trade between developed markets (DM) and emerging markets (EM). The big takeaway: As boomers retire, EM will gain increasing leverage over their older trading partners and extract substantially better terms of trade for their exports. This reverses decades of accepting table scraps, where DM captured much of the trade surplus. This dynamic, coupled with DM’s mounting debt from excessive consumption fueled by printed dollars, suggests that EM assets will appreciate significantly relative to DM assets, largely driven by EM currency revaluation.

Prologue: Boomer Retirement Will Drive Substantial Domestic Wage Inflation

As developed economies age, retirees who consume but do not produce goods and services, will overwhelm young workers domestically. The deteriorating “potential support ratio” of workers to retirees will lead to escalating domestic labor cost. In this future, its likely that labor will have negotiating leverage over retirees with capital, reversing prior decades of near-zero real wage growth. Whereas past economic growth has largely benefited capital, future inflation evens the score for labor. The pendulum always swings back.


Surprisingly, the substantial “financial wealth” accumulated by the boomers will actually aggravate this inflation. This is simply a matter of supply and demand. Retirees with ample nominal wealth must bid aggressively for services from a depleted labor pool. Inflation, after all, is too much money chasing limited production. In that not-so-distant future, we won’t be chanting “bring back manufacturing to America.” Instead, DM will be begging for more cheap imports and immigration from EM to offset inflation.


Despite the central banks’ best efforts, we should not be surprised that wage inflation remains intransigent as boomers retire in droves post-COVID. As boomers’ retirement intensifies, I believe we will lean ever more heavily on emerging economies for production. Developed economies, short of major breakthroughs in automating the human touch (Skynet’s T-800 notwithstanding), must supplement their retiree-dominated population with EM labor. Aging developed markets must preserve their scarce labor force for activities such as health care and home services and outsource as much as possible to the younger emerging markets.


In that future, as the untenable potential support ratio falls dangerously below two, developed markets will need to deplete its financial resources for manufactured goods from emerging markets. DM retirees will outbid each other for EM production. However, to make matters worse, they must also bid against the increasingly wealthy EM consumers.


This will lead to a new chapter in the EM/DM relationship. It will no longer be profit maximization that drives US firms to send jobs to low-cost Asian factories. The shortage of able-bodied workers will drive the next phase of outsourcing. What previously was EM’s dependence on DM for employment will slip to become DM’s dependence on EM for workers.

The Current State of Affairs Regarding DM and EM Trading

To understand the challenges and opportunities as developed markets march into a new relationship with emerging markets, we must understand the current dynamics between DM and EM. Over the past 40 years, EM depended on DM for technology transfer, financial capital, and job creation. In return, DM has received low-cost imports and freed up its workforce for higher value-added creative work. Over the next 20 years, aging developed markets will lean on emerging markets for their younger and more plentiful workforce, giving EM newfound bargaining power. I think the shift in power will also meaningfully shift the relative valuation of assets.


As mentioned before, there will be significant inflation in developed markets driven by wages. We have already begun to witness some of this in recent years. Using a different frame, wage inflation can be seen as the erosion of DM currency’s ability to “purchase” labor hours. This, as I will expound further below, will lead to a meaningful depreciation of DM currency against EM assets and labor supply.


Now before we delve deeper, let me share that this article will primarily focus on the relationship between the export-oriented EM Asian economies and the consumption-driven economies of the developed West. However, in a future edition of The Bridge, I will explore what the future holds for the resourced-based EM economies as well.

The Distant Past: The Emergence of EM Asia Through “Learning and Earning from Exporting”

Over the last four decades, DM economies were firmly in control of a lopsided, albeit co-dependent, relationship with EM Asia. Emerging economies badly needed technology transfer, training, management skill, infrastructure, and financial capital. Low-cost labor was EM’s only “real” currency to exchange for the abovementioned list of critical ingredients for development and growth. EM’s own fiat currencies were of little international value, as they were backed by few valuable assets and plagued by economic and political instability.


What some DM apologists might call “exploitation of EM workers” was indeed what I believe to be the West driving very hard bargains with their EM counterparts, recognizing their superior negotiating position. To be fair, as harsh as the terms of trade might have been in retrospect, EM economies craved these outsourcing opportunities. Yes, the decades of EM laborers working long and hard factory hours for cheap did benefit DM firms substantially, as well as consumers. However, it also brought tremendous knowledge, capital, and other critical ingredients to help many Asian economies escape poverty and build global competitiveness. This is analogous to a new graduate taking on a low starting salary working an 80-hour week, outworking higher-paid senior professionals to build human capital for a better future.

The Present: DM Consumers Spend to Celebrate Life as EM Asia Workers Max Out Overtime

Over time, the skill level of EM Asia’s workers, and consequently the quality of their export products, have improved significantly. This is the famed “learning by doing.” Some in the West complain about Asians ripping off Western intellectual property—be it design concepts, technology, management, or operational know-how. Frankly, when smart, hardworking young people work for or with exceptional experts, these eager professionals learn, adapt, and innovate. This is true of the great entrepreneurs of Silicon Valley, who are also often referred to as pirates by the larger incumbent firms they displace; this is certainly true of savvy Asian entrepreneurs.


Present-day EM Asia (Taiwan, South Korea, Mainland China) is dominated by manufacturers who have evolved significantly beyond providing cheap outsourcing. Many have become world-leading producers of high-value hardware—Samsung, TSMC, Foxconn to name a few. However, despite their manufacturing leadership, EM Asia continues to pursue aggressive exporting to DM, often still on low margins despite the high value-add. They compete fiercely against each other and against themselves to earn dollars and accumulate financial capital. Luckily for DM consumers and firms, there is still a great excess of highly skilled workers in Asia willing to work unhealthy hours to save for retirement.


Of course, the flip side of EM Asia’s export is DM’s overconsumption, leading to ever larger trade deficits and mounting national debt. In short, EM workers grind out long factory hours for DM consumers; EM households gain wealth in the process, while DM households spend down their financial assets in a gradual global convergence of wealth.


However, there is no need to be judgmental about the excessive consumerism of the West. The terms of trade (cheap export prices) offered by the East are simply too attractive, and the West has built so much wealth from its head start in technological innovation and adoption. Living it up is rational and frankly good for all—the global south sure loves the business! The risk is, of course, with the West living too large for too long, ultimately having parties on borrowed money; that unwinding could be chaotic, which brings us to an analysis on what the future might hold as we all get much older.

The Future State: What Aging Demographics Could Mean for the DM/EM Trade Relationship

As developed markets consume more goods produced through outsourcing and financed through newly printed money, the gap between their consumption and production could widen dangerously. That gap is a measure of DM’s dependence on EM manufacturing for containing inflation and maintaining their current standard of living. It is useful to understand that we cannot all have more work–life balance; someone has to do the work. If we all shift toward more life and less work, life becomes expensive quickly. The fact that the West gets to pursue more life away from work is financed by the East embracing the dismal belief that life is hard work.


However, as developed markets move into their boomer retirement phase, the lack of domestic production on top of excessive monetary wealth and debt creation driven by quantitative easing, makes DM fiat currencies appear vulnerable. As DM professionals retire, their companies run low on workers, manufacturing experience, and capacity. As DM savers further spend, they exhaust their hard assets. It begs the question: what future real cash flows and assets might back DM currencies or support the value of their debt and equity shares? Publicly, Powell, Musk, and Dalio question the $32 trillion US debt and the risk it imposes on the US dollar. Privately, EM business owners and governments similarly question their long-standing faith in the almighty dollar.


DM’s aging demographics and deteriorating balance sheets chip away at their greatest asset—strong and highly desirable currencies. It is widely believed by economists and central bankers that the exorbitant privilege of the US dollar has been an enormous contributor to American prosperity. The Nixon government famously said, “The dollar is our currency but your problem.” This succinctly summarizes the predicament of EM, where factory owners send billions in manufactured goods in exchange for dollars that the US government prints at will. This is why today, BRIC+ countries are working aggressively to create a credible trade and reserve currency alternative away from DM currencies.


Chipping away from the other direction is EM’s inevitable rise in wealth. As EM workers accumulate wealth, their desire (or certainly their children’s desire) to consume the fruits of their labor increases. Equally, the desire for work-life balance will reduce the willingness to grind out 14-hr days at a factory. Taken together, its likely that EM workers will simply be less interested to work for DM consumers in exchange for fiat currencies with poor fundamentals and high inflation risk.


Of course, pundits are fond of pointing out EM’s own deteriorating demographics, arguing that EM Asian economies like South Korea, Taiwan, and Mainland China are also aging rapidly and thus will suffer as much, if not more, than their DM counterparts. However, with deeper reflection, it should not surprise anyone that aging EM will hurt DM far more.


Today, EM Asia is defined by overworking, oversaving, and underconsuming, while developed markets are the mirror opposite. Aging EM means they will work less and consume more, resulting in far less exporting and far more expensive export prices. That means aging DM must consume significantly less than they currently do. The pain falls disproportionally on DM as EM also age. EM’s shrinking trade with DM will not be driven by DM taking away work opportunities, but by EM’s unwillingness to work cheaply for DM. For savvy investors, it is important to understand this shifting reality. The Western-centric narrative that the global north provides jobs to EM youth will no longer hold true. Instead, the new story will be the global south caring for DM retirees.


Boomer retirement has global macro implications. It could meaningfully shift the balance of power toward labor and away from capital, and toward EM away from DM. Domestically, inflation will be the moderating mechanism—high inflation will transfer real wealth from boomers to their next generation, who didn’t have the good fortune of participating in the golden era of explosive growth and wealth creation. Internationally, currency will play the role of redistribution from the aging DM to the younger EM. I believe these asset pricing dynamics are simply necessary in equilibrium to ensure that the great abundance of DM nominal wealth and their printed fiat currency cannot overconsume the dwindling global labor pool as the world ages. This answers one of the most puzzling economic questions of our generation: how does the $32 trillion worth of US government debt matter if the principal never has to be paid? Well, soon enough, people who do the actual work will stop wanting to let you party on their dime. Put another way, EM workers will not want to hold DM debt (currency)…and perhaps nor should you.





This article contains opinions subject to change without prior notice. This is not a recommendation to purchase or sell any securities discussed herein. The securities identified and described do not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that an investment in the securities identified was or will be profitable.  This article was written by Jason Hsu, a portfolio manager at Rayliant Global Advisors, as an opinion piece and the opinions herein are those of Jason and not Rayliant Global Advisors.

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