5 Countries Set to Cash In on Demographics

by Alyssa Oursler | July 26, 2013 8:30 am

Western Asset Emerging Markets Debt Fund (NYSE: ESD)Most investors are familiar with dividends, but few are familiar with a little thing called a “demographic dividend.” In some ways, though, it can mean just as big — if not bigger — of a payout for investors long-term.

The Population Reference Bureau[1] describes the demographic dividend as the “accelerated economic growth that may result from a decline in a country’s mortality and fertility.”

While many think a large youth population and overall growth are indicators of strong potential, the opposite is actually true. As birth rates fall, a smaller slice of the population is dependent … and having fewer people to support can accelerate economic growth.

The key, though, is timing. Even a large working population will eventually age, again increasing the dependent population, as is happening with baby boomers here in the U.S.

Luckily, there are plenty of countries that still are in the dependency downtrend necessary for growth, meaning they should hit the sweet spot in the next couple decades. And you can invest in that growth via exchange-traded funds. Take a look:

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Play: Market Vectors Gulf States ETF

The first country with a promising trend is Kuwait. According to data from the United Nations, Kuwait’s dependency ratio slightly reversed from 2005 to 2010 after dropping for nearly three decades. Since then, though, the downward trend has resumed.

Plus, the proportion of the population that is dependent is projected to keep dropping until around 2025, and remain near that low for another half-decade.

While the country is slated to have a dramatic slowdown in economic growth this year[3] thanks to political unrest, population data suggests that an uptick in the coming decades is more than possible if it gets such issues sorted out.

While it’s tough to get direct exposure to Kuwait, the Market Vectors Gulf States ETF (MES[4]) is one option. Two of its top five holdings — Bank of Kuwait and Mobile Telecommunications Co. KSC — are Kuwait-based companies, while the other three are located in the United Arab Emirates, which boasts a similar demographic trend.

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 iShares MSCI Mexico Index Fund

For the next pick, you just have to travel south of the border. As I explained the first time[5] I broke down the “demographic dividend,” Mexico’s population profile looks just right for growth.

Its dependency ratio has been falling since it bulged in the ’70s and is set to bottom out just before 2030. That makes now — around two decades before the reversal — a prime time to play the region.

The easiest way to get exposure: Snatch up the iShares MSCI Mexico Index Fund (EWW[6]) — which has gained 10% during the past year despite a rough start to 2013.

Of course, Mexico is also home to lots of direct plays as well, including Fomento Economico Mexicano (FMX[7]), a top-five pick so far in InvestorPlace’s Best Stocks of 2013[8] contest. Remember, though, the real upside will likely come longer-term … not necessarily this year.

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Play: iShares MSCI Turkey Index Fund

Another country whose index fund has been lagging so far in 2013 but that looks poised for longer-term growth thanks to its demographics is Turkey. While the country’s steepest slide in dependency ratio is already in the rear-view, the working population is still expected to grow for a little over a decade.

So far this year, Turkey’s struggles have come thanks to “weak domestic demand and spillover from the European debt crisis,” according to The Wall Street Journal[9], while that domestic demand was hurt by tightening economic policy.

Which brings us to an important point: Population trends will only take off when surrounded by the proper policies. That said, Turkey still has plenty of time to get things back on track, and it has the perfect foundation for an economic explosion whenever that happens.

If you believe in that potential, the iShares MSCI Turkey Index Fund (TUR[10]) is the obvious pick, while a top-10 holding like telecom Turkcell (TKC[11]) is another way to gain exposure.

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Play: Market Vectors Indonesia Index ETF

Next up, we have our first Asian play. While many associate China with growth potential because it’s a BRIC nation, its dependency is already bottoming out … just as its growth is slowing down.

Indonesia, on the other hand, still has room to run. Its curve — looking at the probabilistic median — will likely bottom out as we near the year 2030, meaning good growth conditions will be around for some time.

Many investors seem to have already scoped out those conditions, as the country attracted a record amount of foreign direct investment in the second quarter of the year — a whopping $6.5 billion, and the sixth straight record.

If you believe a growing middle class of working-age folks will be enough to keep southeast Asia’s largest economy chugging alone, there’s a pure play in the Market Vectors Indonesia Index ETF (IDX[12]). It has been middling since logging nice gains in 2009 and 2010, but could be poised for more upside and new highs in the years to come.

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Play: Market Vectors Africa Index

Of course, we can’t have a growth list without considering Africa. The biggest hurdle in this case, though, is simply that it’s hard to sift through and get exposure to only the countries with promising profiles.

One such country: Morocco. As you can see in the chart, the biggest drop in the dependency ratio has already taken place, but that low point isn’t slated to make a quick reversal. Instead, the large working-age population is expected to last from approximately 2015 to almost 2040.

That’s a lot of time — which means a lot of time for growth.

The best way to try to cash in is to simply snatch up the Market Vector Africa Index Fund (AFK[13]), considering a handful of other countries — including Cape Verde, Algeria and Western Sahara — also have similar profiles. Plus, Morocco’s Attijariwafa Bank is a top-10 holding.

Of course, it’s far from a pure play and comes with a pile of variables … but that’s true for any country you choose that’s possibly on the verge of an economic explosion.

As of this writing, Alyssa Oursler did not hold a position in any of the aforementioned securities.

  1. Population Reference Bureau: http://www.prb.org/Publications/PolicyBriefs/demographic-dividend.aspx
  2. Compare Brokers: https://investorplace.com/options-trading/broker-center/
  3. dramatic slowdown in economic growth this year: http://www.ft.com/intl/cms/s/0/6a83eb40-9148-11e2-b839-00144feabdc0.html#axzz2Zz1zFaNE
  4. MES: http://studio-5.financialcontent.com/investplace/quote?Symbol=MES
  5. As I explained the first time: https://investorplace.com/2013/01/play-this-demographic-dividend-long-term/
  6. EWW: http://studio-5.financialcontent.com/investplace/quote?Symbol=EWW
  7. FMX: http://studio-5.financialcontent.com/investplace/quote?Symbol=FMX
  8. Best Stocks of 2013: https://investorplace.com/best-stocks-for-2013/
  9. according to The Wall Street Journal: http://online.wsj.com/article/SB10001424127887323296504578396200677967468.html
  10. TUR: http://studio-5.financialcontent.com/investplace/quote?Symbol=TUR
  11. TKC: http://studio-5.financialcontent.com/investplace/quote?Symbol=TKC
  12. IDX: http://studio-5.financialcontent.com/investplace/quote?Symbol=IDX
  13. AFK: http://studio-5.financialcontent.com/investplace/quote?Symbol=AFK

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