With Asia’s elderly population poised to double within four decades, more money is being plowed into preserving wealth than enhancing growth, driving up demand for the region’s bonds that are beating returns on stocks.
The number of Asians 60 or older will exceed 1.25 billion, or 24 percent of the population in 2050 from 10 percent in 2011, according to data compiled by the United Nations. That helps explain the surge in pension fund assets and shows why the region’s emerging-market debt returned 63 percent in the five years through 2011, according to a JPMorgan Chase & Co. index. The MSCI Asia-Pacific Index of shares excluding Japan gained 17 percent in that period.
While the bond rally drove down sovereign yields, it is also forcing insurers to seek higher returns in riskier debt across Asia, according to Cathay Life Insurance Co., Taiwan’s largest, and Singapore’s NTUC Income Cooperative Ltd. The elderly typically reduce risk to retirement savings by limiting holdings of equities needed to help fund Asia’s economic growth.
“The graying population will matter,” said Thiam Wooi Lye, a senior manager who helps manage $20 billion at NTUC, Singapore’s third-largest insurer. “The returns on equity won’t compensate for the liabilities from pensioners. They will increase allocations to bonds.”
Pension Assets Triple
Pension-fund assets in South Korea will almost triple to 1,919 trillion won ($1.7 trillion) by 2020 from 2011’s 746 trillion won, according to Son Seong Dong, the head of a Seoul-based pension research body established by Mirae Asset Financial Group, which controls South Korea’s biggest mutual fund with $55 billion in assets.
Investors over 50 prefer bonds’ fixed payments, as “prudence trumps desire,” Singapore-based Volatility Research & Trading Ltd. wrote in a Jan. 15 report. In South Korea, there are now 1.2 people aged over 50 for every person between 35 and 49, the part of the population that favors stocks, the company said. The ratio will climb to 3.6 by 2046.
Taiwan will have 413 people aged over 65 for every 100 under 15 by 2050, compared with Japan’s 339, according to the Council for Economic Planning and Development in Taipei. About 38 percent of Singapore’s population will be older than 60 by 2050, up from 12 percent in 2005, UN data show. After expanding 2.5 percent a year for the past three decades, China’s working-age population has stopped growing and will contract 1 percent a year by the mid-2020s, according to the Center for Strategic and International Studies in Washington.
‘A Big Problem’
“In five to 10 years there’ll be a big problem,” said Ethan Huang, who helps oversee NT$200 billion ($68 billion) as a fixed-income portfolio manager at Cathay Life in Taipei. “The birth rate is dropping really fast. It’ll hurt local consumption and eventually economic growth.”
Japan’s shrinking labor force has triggered two decades of slowing growth and falling stock prices, Ajay Kapur, Deutsche Bank AG’s head of Asian equity strategy in Hong Kong, wrote in a Jan. 6 report.
While investors lost money in equities and gained with government bonds, returns shrank as interest rates slumped. The Nikkei 225 Stock Average is almost 80 percent below the record close of 38,915.87 on Dec. 29, 1989. The yield on Japan’s benchmark 10-year note fell to 0.99 percent, from 5.73 percent in the same time. Investors in government debt earned 90 percent during the 1990s and 20 percent in the following decade.
Taiwan’s expansion may slow to 3.5 percent per year this decade, from 5.1 percent in the 20 years through 2010, according to Singapore-based DBS Group Holdings Ltd. Developing Asian nations will see growth of 7.8 percent this year after 8.2 percent in 2011 and 9.7 percent in 2010, the World Bank forecast last month.
Cathay Life is interested in government debt from South Korea, Thailand and Indonesia as well as yuan notes sold in Hong Kong, known as Dim Sum debt, said Huang. Taiwanese insurers are also buying bonds rated BB by Standard & Poor’s, the highest junk ratings, after limiting holdings to those rated A, four levels higher, he said.
Yields on Taiwan’s 10-year government bonds have fallen to 1.29 percent from 4 percent a decade ago, according to data compiled by Bloomberg. Singapore’s slid to 1.53 percent from around 4 percent and Indonesia’s dropped to 5.14 percent from 11.5 percent.
Climbing pension assets have caused the gap between corporate and government yields to narrow, making it harder for fund managers to deliver returns, Mirae’s Son said.
“Society is aging at a surprisingly rapid pace,” he said. “With too much money chasing limited pools of assets, domestic bond yields have come down quite fast. It’s a big challenge for fund managers to find investments with safety and reasonable returns.”
Five-year Korean corporate bonds with the lowest investment grade of BBB- yield 654 basis points, or 6.54 percentage points, more than similar-maturity government securities, down from 7 percentage points a year ago.
“A large percentage of Korean pensions promise investors a fixed return and, with sovereign yields at record lows, it has become a major task for us to find higher-yielding yet low-risk assets,” said Kim Hee Seok, Seoul-based chief investment officer of Korea Life Insurance Co., the nation’s second-biggest, with $59 billion in assets. “Insurance firms will be buying bonds whenever yields climb.”
Asia isn’t alone. Labor pools are also poised to shrink in Brazil, Russia, India and China, known as BRICs, causing global growth to peak at about 4.3 percent this decade and fall to 3.9 percent in the 2020s, according to a Dec. 7 report by Goldman Sachs Group Inc.
Goldman Sachs Asset Management Chairman Jim O’Neill, who coined the BRIC acronym a decade ago, said in a December interview from London that he favored developing economies with “large young populations,” including Indonesia, Turkey, Egypt and Mexico.
Bonds also beat stocks for reasons besides changing age patterns. The worst financial meltdown since the Great Depression and Europe’s sovereign debt crisis have driven investors to the relative safety of fixed income. Companies raised $442.5 billion in equity sales last year, down 29 percent from 2010, Bloomberg data show.
Increased pension assets will make the region’s bond markets more actively traded and so less risky, according to Iwan Azis, the Manila-based head of Office of Regional Economic Integration at Asian Development Bank.
Outstanding debt in East Asia’s emerging markets increased 5.5 percent to $5.5 trillion as of Sept. 30 from a year earlier, the ADB estimates. The asset-management industry in Asia outside Japan may double to $4 trillion by 2015, from $2.2 trillion in 2011, according to a survey of fund managers by Cerulli Associates in Singapore.
“The demographic change will add depth and liquidity to Asian bond markets,” increasing investment in corporate bonds, he said.
Asian life insurers “drove” demand last month when Beijing-based China Development Bank Corp. sold 1.5 billion yuan ($238 million) of 15-year debt in Hong Kong, the longest maturity for a Dim Sum note so far, said Ken Wei Wong, director of debt syndication at Barclays Plc in Singapore. Korea’s government said last month it plans to sell its first 30-year debt this year to satisfy demand from pension funds.
“Bond markets in Asia have become more vibrant since the crisis,” said NTUC’s Lye, who is targeting debt in Indonesia, Malaysia and China. “The graying population will be looking for yields and returns.”