A Mix of Headwinds and Tailwinds | Capital Group


Investment Insights

September 2015

A Mix of Headwinds and Tailwinds

“Just as the end of the commodities supercycle is actually a boon for importer nations, demographic trends in some emerging markets countries continue to appear relatively favorable for the next decade and beyond.”

—  Greg Garrett

Greg Garrett Fixed-Income Investment Specialist New York office 29 years of experience (as of 12/31/16)

Coinciding with the weakness in industrial commodity prices, energy prices have also fallen significantly since the middle of 2014. This has been driven by the growth in supply from new sources in North America as well as some impact from reduced global demand. On balance, lower energy prices are supportive for global growth, but have a mixed impact across producing and consuming economies.

Lower energy prices have provided economic support to energy importers. Some countries, such as India and Indonesia, have taken this one step further and reduced energy subsidies which allows for the newfound revenue to be used in more productive ways. Exporters of oil such as Russia and Venezuela have been forced to reduce fiscal expenditures in order to meet budget targets. Their currencies have also come under pressure, but this has helped alleviate some of the negative impact of lower oil prices. Demographics have traditionally been seen as a tailwind for emerging economies, but this wind is beginning to shift direction for some nations.

In the past couple of decades, growing populations of young and working-age people have helped fuel growth. But in some countries, this so-called demographic dividend is diminishing. In China and several other emerging countries, birth rates are low or falling, and growth of working-age populations is slowing. In the future, aging populations will likely put greater strain on government finances and may cause household savings and investment to decline, leading to slower per capita economic growth.

That said, it’s worth re-emphasizing that each country is different. Just as the end of the commodities supercycle is actually a boon for importer nations, demographic trends in some emerging markets countries continue to appear relatively favorable for the next decade and beyond. And over the longer term, India and Indonesia (which, incidentally, are also net importers of oil) are among the countries that stand to reap the benefits of a relatively large working-age population for several decades to come.

Lower Commodities, Demographics May Be Tailwinds for India, Headwinds for Russia

West Texas Intermediate crude oil price, London Metals Exchange copper price and Thomson Reuters/Jefferies CRB Iron Ore 62% FE CFR China Cash price. Month-end price data (rebased to 100 starting December 31, 2013) through July 31, 2015. Population data and transition characterization from Moody’s Investors Service, using United Nations data.

Sources: FactSet, Moody’s Investors Service.

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