Emerging markets India and Indonesia gain favour as demographics drive investment strategies

Fidelity International and BlackRock Investment Institute have reported that emerging nations with strong population growth, such as India and Indonesia, are becoming more appealing to investors as demographic concerns begin to impact investment decisions.

Investment in these two growing Asian countries is encouraged by anticipated increases in infrastructure spending, which are expected to revitalise their economies. Recent elections in India and Indonesia have underlined their ambitions to become major economic powers, with their dynamic populations serving as a critical strength.

Among the rapidly ageing regional peers, China, India, and Indonesia stand out. India surpassed China as the world's most populated country in mid-2023, prompting a rush to find prospective South Asian stock market winners.

According to BlackRock's data, there is a favourable association between a country's working-age population growth and share price valuations. Fidelity sees the financial sector as a big benefit, with rising credit demand from both firms and consumers.

"India and Indonesia's labour forces are young, with demographic dividends that far outweigh some of the region's largest economies," said Ian Samson, a portfolio manager at Fidelity in Singapore. "All businesses, large and small, require capital. This helps to explain why bank equities tend to correspond with GDP growth in emerging markets.”

According to World Bank estimates, India and Indonesia are forecast to witness population rises of at least 10 per cent between this year and 2040, while China is expected to see a roughly 4 per cent fall. More importantly, India's working-age population (those aged 15 to 64) is growing, and the country has the youngest demographic of any major economy.

In March, BlackRock Investment Institute strategists led by Jean Boivin noted that a faster rise in the working-age population frequently correlates to stronger future profit growth. They also identified migration, increased labour-force participation, and automation as key drivers.

The demographic dividend, coupled with other distinct characteristics such as favourable election results, is one of the primary drivers of gains in both countries' stock markets. The Nifty 50 Index, which is trading at record highs, is on track to extend its nine-year winning streak. Similarly, in March, the Jakarta Composite Index achieved a record high.

Analysts argue that structural reforms aimed at cutting regulatory red tape, increasing job market flexibility, and allowing foreign investment are vital for capitalising on the demographic advantage.

"Ultimately, the growth equation is employment times productivity," Fidelity's Samson explained. "The substantial structural reforms in both India and Indonesia will support sufficient job creation to benefit from the demographic dividend."

Despite improvement, more action is needed. Investors are paying special attention to whether Indian state governments would execute national-level labour, land, and policy changes. Indonesia's President-elect Prabowo Subianto, who will take office in October, has ambitious aspirations of achieving 8 per cent yearly GDP growth, despite the country's historically low performance.

For sovereign debt investors, the age-dependency ratio, which indicates the fraction of those who are too elderly or young to work, and the fiscal burden are critical long-term investment indicators.

According to Bloomberg data, global investors have invested $5.5 billion in Indian bonds this year, boosted by chances for index inclusion. India's interim budget, unveiled in February, prioritised infrastructure spending above populist initiatives ahead of the general election.

In contrast, international investors have withdrawn $1.8 billion from Indonesian bonds, citing concerns about the country's fiscal health because of the incoming administration's increased spending commitments.

"Aging populations increase the cost of healthcare and pensions, with developed-market economies providing more comprehensive social benefits than most emerging markets," said Sanjay Shah, director of fixed income at HSBC Global Asset Management. "In emerging markets, pension plans may be more staggered and less fixed-benefit oriented," Shah added, thereby lowering the public financial load.

(With inputs from Bloomberg)