The big theme for investors over the last several months has been AI. It has powered stocks like Nvidia (NVDA), Microsoft (MSFT), and Meta Platforms (META). But it's not the only thematic trade out there.

BlackRock US Head of Thematic and Active ETFs Jay Jacobs is watching the changing age demographics, not just in the US, but globally. He highlights "youthful" emerging markets. As Jacobs explains, a lot of developed markets have about the same number of seniors as young people, which presents certain challenges. However, places like Mexico and India, he says, have large youthful populations, which means their "workforces are growing, they have ample amounts of labor, they get to participate in this changing supply chain around the world... So there's this huge advantage in these emerging markets that have younger populations and all this labor available to build things."

Watch the video above to hear the themes Jacobs says may benefit from stickier inflation.

For more expert insight and the latest market action, click here to watch this full episode of Market Domination.

This post was written by Stephanie Mikulich.

Video Transcript

JULIE HYMAN: Well, stocks closing the day in the red following that stronger than expected CPI print. The hot data complicates the Federal Reserve's next move on interest rates as the central bank works to bring inflation back down to its 2% target. For more on the Fed and the latest market moves, Jay Jacobs is with us from BlackRock.

Jay, I have to admit as we were just talking about how everybody has liked small caps. It made me wonder if you had liked small caps since you're here on set with us. I didn't see it in things that you like today.

But I know we're going to talk about big picture about CPI, et cetera, et cetera. I'm curious what you think of that. So many people have been such a fan of small caps this year.

JAY JACOBS: Well, we really focus on what are the long-term structural trends. So I'm a little bit less concerned about the market cap, large cap, mid-cap, small cap. And it's how are you benefiting from the tailwinds in the market today.

Now, obviously, AI is one of the biggest tailwinds. But another potential tailwind is what's happening with demographic divergence and aging populations. This is the fact that in the United States today, for the first time, there are more people over the age of 65 than under the age of 15.

So there are small caps in the health care space and biotech companies that really get to benefit from that tailwind. So I don't want to bucket them in with necessarily the traditional kind of core small cap, but more of the thematic small caps that are interesting.

JOSH LIPTON: You also talked about opportunity you call on youthful emerging markets. What is the definition of a youthful emerging market? And what are some examples?

JAY JACOBS: Sure. So you really have to look at the demographic disparity that you see around the world today. So a lot of developed markets, the United States, Europe, even China to some extent, you see have really been aging. You would expect to see a pyramid of age demographics. Not that many senior citizens and a lot of young people supporting that aging population.

But we see in developed markets today is more of a cylinder. You have almost as many young people as seniors. And that creates challenges because that means you have a lot of people who have more health demands, that are in retirement, that are not a part of the workforce.

And that shape doesn't really have a conducive element towards growth. But you compare that to other countries like Mexico and India where they do have these large youthful populations. Their workforces are growing.

They have ample amounts of labor. They get to participate in this changing supply chain around the world where the US is looking for who's going to be our partner to help build electric vehicles and to help build semiconductors. So there's this huge advantage in these emerging markets that have younger populations and all this labor available to build things.

JULIE HYMAN: And so you would look at those markets broadly. I do want to bring it back to the US for just a second and talk a little bit about the macro dynamics that we are seeing in terms of inflation not slowing down as much as the Fed would like. Are there any of the themes that you're watching in the US that sort of can stand to benefit from that?

JAY JACOBS: Yeah. So one of the themes that is really I think tangential to inflation being stickier is this demographic divergence. So when you have more people retiring in the United States and a workforce that is essentially not growing that quickly. And over the last 10 years, we created about 20 million jobs in the next 10 years, we'll probably create 5 million.

You don't have as good of worker replacement as you would like. And that means workers get to demand higher wages. That results in inflation. Inflation, therefore, tends to be stickier. So that can really benefit.

One of the areas that might be a winner in this inflationary trade, though, is going to be artificial intelligence. We see that about 60% of CEOs like artificial intelligence because of how it can get more efficiencies in their businesses. So if you're expecting stickier inflation, if you're expecting workforce shortages to persist, you know, how do you automate, how do you leverage technology more effectively and make your workers more productive? AI is really perfectly situated for that.

JOSH LIPTON: And just looking overseas again, Jay, you also say, listen, maybe look to those regions, those countries that are going to benefit from supportive public policy. What's an example of that?

JAY JACOBS: I think Japan is a great story right now. They have really been kind of in a period of pretty stagnant growth for a long time. But, in fact, the markets have now exceeded their all time high, which was originally reached over 30 years ago.

And it's because one, they have good inflation. We kind of have bad inflation. We don't want inflation in the United States right now. We want it to come down.

But in Japan, they've wanted it to come up because that allows their workers to negotiate higher wages, which can result in more consumption and really kind of reinvigorate economic growth there. So they have that good inflation right now.

But secondly, the government in Japan has come in and really looked at a lot of the companies that haven't grown in 20 or 30 years and said, you need to focus on shareholders, you need to return capital to shareholders, and you have to get more profitable. And that alone has really reinvigorated the markets in Japan to be paying more dividends and doing more buybacks than they've ever done before to get these companies focused on profitability.

So we've seen our Japan ETF. EWJ was our fastest growing single country ETF over the last year, bringing in about $4 billion on that interest in Japan.

JULIE HYMAN: And the irony, of course, is that demographically, Japan was almost exactly the inverse of the other thing you're talking about. But that started to improve a little bit, right?

JAY JACOBS: They've been working on getting more inclusivity in their workplace to help address some of the worker shortages they've been facing. But also one of the leading countries in the world for robotics and artificial intelligence is Japan. And that's no surprise.

These themes are related to each other. When you have pressures like shrinking workforces, you need to figure out how to get more productive and automate.

JOSH LIPTON: And Jay, we talked about these opportunities overseas. You mentioned Japan, India, Mexico. What about China? What are your thoughts there?

JAY JACOBS: Yeah, you know, China, we increasingly see as such a large country that you really have to break it out from the rest of emerging markets. So one of our fastest-growing funds right now is emerging markets ex China because. People are really looking at it.

Much like they looked at Japan 20 or 30 years ago where it was so big in Asia, that people looked at the APAC region ex Japan and went have an opinion on Japan separately. We see that happening with China as well. Really kind of treating it as a standalone because of how large of an economy it is and how it trades differently than the rest of EMS.

JULIE HYMAN: Jay, good to see you. Thanks for coming in. Jay Jacobs is BlackRock US Head of Thematic and Active ETFs. Thanks.