India and Indonesia Attract Investors Amid Demographic Shifts

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Fidelity International and BlackRock Investment Institute have identified India and Indonesia as attractive investment destinations due to their robust population growth, highlighting a significant trend as demographic factors increasingly influence investment decisions.

Economic Growth Fueled by Infrastructure

Spending Investment in these Asian nations is bolstered by anticipated increases in infrastructure spending, expected to stimulate their economies. Recent elections in both countries have showcased their ambitions to emerge as major economic powers, leveraging their dynamic and growing populations.

Demographic Advantage in the Region

India and Indonesia stand out among their rapidly ageing regional peers. India surpassed China as the world’s most populous country in mid-2023, sparking a keen interest in South Asian stock market opportunities.

According to BlackRock’s data, there is a positive correlation between a country’s working-age population growth and share price valuations. Fidelity highlights the financial sector’s potential, driven by rising credit demand from businesses 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.”

Population Growth Projections

World Bank estimates forecast population increases of at least 10 % for India and Indonesia between now and 2040, while China is expected to see a roughly 4 % decline. Notably, India’s working-age population (ages 15 to 64) is expanding, making it the youngest demographic among major economies.

Market Performance and Reforms

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

The demographic dividend, combined with favorable election outcomes, is a major factor driving stock market gains in both countries. The Nifty 50 Index in India is trading at record highs and is on track to extend its nine-year winning streak. Similarly, the Jakarta Composite Index in Indonesia reached a record high in March.

Analysts emphasize the importance of structural reforms to reduce regulatory hurdles, enhance job market flexibility, and attract foreign investment to fully exploit 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.”

Challenges and Future Outlook

Despite progress, more efforts are needed. Investors are closely monitoring whether Indian state governments will implement national-level labor, land, and policy changes. Indonesia’s President-elect Prabowo Subianto, who will take office in October, has ambitious plans to achieve 8 % annual GDP growth, despite the country’s historically low performance.

For sovereign debt investors, the age-dependency ratio, which measures the proportion of those too old 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, driven by the potential for index inclusion. India’s interim budget, unveiled in February, prioritized infrastructure spending over populist measures 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 due to increased spending commitments from the incoming administration.

“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.