A TPDEARR Article
Trans-Pacific Dynamic Equity Allocation Research Report
Demographics—the description of populations—are no less utilized by capitalists than policymakers, but of course it’s the mutually-perpetuating economists, huddled together within the capitalist fracas, that are obliged to coin terms like “demographic dividend” that mischaracterize words in order to describe observable phenomena. James Kwak has cleanly covered the basics of economic mischaracterization in his book Economism, so we needn’t retread the same ground here, suffice it to say that we have qualms with how the word “dividend” is applied in the above case (and others), and we’re going to take a closer look at these particular issues below and what they suggest for guiding investment capital flows around the trans-Pacific over the intermediate term.
Dividends
The word dividend, of Latin etymology in the early 15th century, and clearly suggestive of “division”, is conventionally understood in two main ways: mathematically, as a number or quantity which is to be divided; and financially, as a corporate distribution of a portion of its profits to shareholders. Keeping this in mind, it would seem that neither of the two most popular socio-cultural “dividends” are even dividends at all.
Age “Dividends”
Every economy is loosely bound by the process of its population’s aging. As economic development advances, reductions in child mortality and fertility correlate with disproportionate increases in the labor force relative to population growth and the total number of dependents. This usually produces more wealth than is needed to care for people, and this whole process, which typically lasts a few decades, is commonly referred to as the “demographic dividend”, the “extra” earnings of which can be reinvested in economic growth and further advancement, including capital growth. The demographic dividend helped accelerate development in South Korea, from the 1960s to the turn of the millennium, and in China, from about the Deng Xiaoping era in the 1980s until now, though its days are likely numbered there, as always. It’s not exactly a cash payout from money invested, but it sort of qualifies as a financial dividend in that the aggregate result is a relatively greater amount of capital becoming available for a population to use. Then again…
What will happen to a demographic-dividend-boosted economy in another decade or two, as advances in medical technology keep people older for longer, and fertility rates drop below replacement level, causing a population to crash and labor force growth to sputter out? These types of dire circumstances are already facing Japan and South Korea. They benefit from the “dividend” no longer; in fact, economic difficulties are getting multiplied, almost as if now it’s their time to “pay back” the dividend, as the total population of dependents rises in number and cost. Wait a minute, that’s not how dividends work! They are really more like temporary production boosts, but with potential clawback clauses.
Around Southeast Asia, the situation is hardly rosier within ASEAN countries. Thailand is perceived to have already passed the height of its demographic bulge, and now faces collapsing fertility without having advanced into the higher economic tiers. The “dividend” never really paid off the same way as it did in comparatively richer East Asia. The Philippines and Indonesia are the only two Asian countries that still have fertility above replacement level, and their populations are large enough to stretch out their “dividends” for over half a century, but they may each have only a decade or two left, at most, to fully capitalize before numbers start to decline. Both economies know this, and they’re both working on the issue, but there’s only so much that can be done to motivate people to either procreate or work harder. The hard truth: not every economy will be able to ascend into the higher (=richer) tiers.
Age, itself, is a highly subdivisible metric with significant differences across boundaries, so it’s risky to make sweeping conclusions about future scenarios. For example, a growing cohort of researchers is calling more attention to yet another age-related “dividend” known as the silver dividend, which refers to a population’s more-elderly subgroups and how they can be reinserted into an economy with age-appropriate work, contributing to overall growth. Is this a dividend? And for who? The elderly themselves certainly wouldn’t be reaping the benefits, having to work rather than rest in the evening of their lives. Jiggering the right stats to soothe policymakers is an art that can make any reality seem preferable, or at least profitable: the capitalist class, ladies and gentlemen.
So what does this mean for investors? Apart from implications about the expansion of elder care opportunities, it means that demographic readjustments are both inevitable and complex. Age groups are rarely uniform or consistent across international comparisons, such as the Bubble Era generation in Japan having other characteristics unshared by their similarly-aged cohort—the US Baby Boomers. And while different goods and services appeal to different age segments (tapped into through intelligent generational marketing), even strong consumers patterns are subject to waver and change over time. A phenomenon unlikely to waver across generations, though, is the demand for modernity, which investors can certainly tap into. Nobody wants to be left behind. Nobody wants to install last decade’s technology. Nobody wants to pay for outdated solutions to infrastructure and modern life. And as we’ve discussed in the DEC.23 Natural Elements article, the foundation of modern life is electricity. No matter how old the user base, [DEC.23 Squad Asset #1], for one example, will be demanded by all, and [DEC.23 Squad Asset #2] will be required to realize the demand. The intermediate term of 12-18 months from now will not alter this logic.
Diversity “Dividends”
Apart from age, “dividends” are also thought to be gained from increases to gender and racial diversity in the business environment, called the “diversity dividend”. Again, these aren’t conventional dividends, but rather this time they are increases to the likelihood of a particular company overperforming compared to its peers, based on its relative diversity. The Western institutions of the Harvard Business Review and McKinsey Consulting have reported extensively on these benefits, but to be clear, the vast majority of the associated research is heavily based on European and American enterprises, so there is significantly less empirical evidence of the legitimacy of these claims as they pertain to Asia-based companies, and the specificities of Asian cultural issues they’re immersed in. Nonetheless, the boost in a company’s overperformance due to relatively high gender and racial diversity is founded in the accumulation of differing viewpoints, histories and cultures that enable a firm to more nimbly (read: profitably) navigate changing commercial circumstances for economic success. This logic appears sound irrespective of where and within which companies it is occurring throughout the world. The more females and minorities represented in a business, in particular in its executive halls, the better prepared is that business for navigating uncertainty. In other words, diversity makes companies more capable of gaining from disorder; this is the definition of antifragility.
As we, as investors, scrutinize company boards and executives for key insight about potential growth and value, we would be wise to weigh diversity heavily into our capital allocation decisions. Because nation-states don’t compile and distribute workforce ethnic diversity data, we must look into these notions individually, and for each distinct enterprise we peer into. National-level policymaking can substantially alter immigration standards and enhance or constrict the flow of intelligent and diverse workforce participants across a country’s borders. As we discussed in the DEC.23 Geopolitics article, the current thrust of most major economies is towards ally-based cooperation and mutual benefit, not isolationism. But, things can change quickly.
And remember, the diversity dividend is not a cash return, it’s an intra-enterprise infrastructural boost and enhancer of capitalism decision-making. We find [DEC.23 Squad Asset #2] to be a more-compelling agent of diversity, strongly positioned to weather storms in the intermediate term.
tkscm, limited 