Asia set to gain from global aging

Asia set to gain from global aging

TOKYO (Reuters): Asia's emerging financial markets could become global outperformers as a cyclical decline in the world's most developed economies, rooted in rapid population aging, triggers a huge shift in global asset allocation.

"Some of these emerging markets are going to be wonderful places to invest over the next few decades," Sylvester Schieber, vice president of consulting actuaries Watson Wyatt Worldwide, told Reuters.

"Their economies will be expanding, their people will become wealthier and there's going to be greatly increased international demand for their asset markets," Washington-based Schieber said on the sidelines of a gathering of 400 investment experts, policymakers and academics to discuss the global aging crisis.

The world's most developed markets face decades of decline as falling productivity and the increased propensity of pensioners to cash in investments wrecks rates of return, experts say.

The scale of the demographic shift will sap productivity and could slash half a percentage point off annual economic growth in the European Union and Japan and 0.2 percentage point off growth in the U.S. for each of the next 50 years.

The picture is particularly bleak in Japan, the world's greyest economy, which could see a decline of five percent in the size of its workforce over the course of the next decade with a corresponding decline in relative rates of investment return.

The country's overall population is forecast to shrink for the next 100 years.

Faced with this investment backdrop fund managers are expected to seek out higher rates of return in the emerging markets of Asia, Latin America and to a lesser extent Africa.

"For most western European economies and for people based in Japan, it probably makes sense to pursue international investment strategies pretty aggressively right now," Schieber said.

Emerging Asia makes a particularly compelling case given the scale of the anticipated rise in the region's level of savings relative to the Group of Seven (G7) leading industrial nations.

Don Ezra, director of strategic advice at consultants Frank Russell, said the savings of Hong Kong, Taiwan, Singapore and South Korea could grow from being around a fifth of the level of the G7 in 1995 to more than five times as much by 2050, depending on the estimate model used.

Fund managers say the huge savings rates of the 40-60 year old Baby Boom generation in the U.S. and Japan has effectively underwritten steady rises in equity prices in both countries as that demographic group grew bigger and richer.

Analysts say there is no reason not to expect a similar correlation in emerging markets.

"Anyway you look at it, Asian savings are going to grow in global significance...It underlines the fact that emerging markets will represent increasingly important investment opportunities in future," Ezra said.

But Ezra was less certain that global investors would soon embark on a huge switch in asset allocation strategy.

A Frank Russell survey of investors controlling US$7 trillion of investment capital showed they already invested about five percent, or $350 billion, in emerging market assets.

The five percent allocation is sufficiently large to make meaningful returns yet small enough to ensure that overall portfolio liquidity would not be too hard hit if political or other risks prevented investors from withdrawing funds.