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1 Global Equity Research Emerging Markets Research Analysts Alexander Redman alex.redman@credit-suisse.com Arun Sai arun.sai@credit-suisse.com Credit Suisse Research Institute THEME Emerging capital markets: The road to 23 Source: istockphoto.com For the most part, emerging nation capital markets remain underdeveloped relative to the size of their economies despite rapid growth in capital-raising over the past two decades. We believe this gap will close, driven by a disproportionately large contribution from emerging equity and corporate bond supply (as company capital structures increasingly benefit from lower financing costs via disintermediation of bank loans) and by demand (driven by growth in domestic mutual, pension and insurance funds), given relatively high savings ratios prevalent among emerging economies. In this proprietary study, we extrapolate established historical patterns of growth in emerging and developed capital markets to assist in projecting their absolute and relative dimension and composition of market value by the year 23. We find a strong relationship between the historical expansion of developed nation aggregate equity and corporate bond market value relative to GDP and gains in economic productivity, and thus make projections for both emerging and developed market equity and fixed income issuance. We project implied underwriting fees and commissions from primary and secondary capital markets activity, and we then apportion future emerging market equity and fixed income deal revenue between emerging and developed market domiciled financial services companies, employing the evolving observed trends in allocation. DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION Client-Driven Solutions, Insights, and Access

2 Credit Suisse Research Institute 2 Figure 1: Credit Suisse HOLT Emerging Capital Market Opportunities basket (Bloomberg: CSERECMO Index <Go>) Company Bloomberg Ticker Industry group Country Weight CFROI/CFROE Value/Cost Economic PE CFROI/CFROE momentum* Macquarie Group MQG AT Equity Investment Banking & Brokerage Australia 3.33% Banco do Brasil BBAS3 BS Equity Diversified Banks Brazil 3.33% Bradesco BBDC4 BS Equity Diversified Banks Brazil 3.33% BTG Pactual Part BBTG11 BS Equity Diversified Capital Markets Brazil 3.33% Cetip CTIP3 BS Equity Asset Management & Custody Banks Brazil 3.33% Agricultural Bank of 1288 HK Equity Diversified Banks 3.33% Bank of Ltd 3988 HK Equity Diversified Banks 3.33% Bank of Communications 3328 HK Equity Diversified Banks 3.33% Citic Bank 998 HK Equity Diversified Banks 3.33% Construction Bank 939 HK Equity Diversified Banks 3.33% Merchants Bank 3968 HK Equity Diversified Banks 3.33% ICBC 1398 HK Equity Diversified Banks 3.33% ICICI Bank ICICIBC IS Equity Diversified Banks India 3.33% Industrial Bank of Korea 2411 KP Equity Diversified Banks Korea 3.33% Riyad Bank RIBL AB Equity Diversified Banks Saudi Arabia 3.33% Samba Financial Group SAMBA AB Equity Diversified Banks Saudi Arabia 3.33% RMB Holdings RMH SJ Equity Other Diversified Financial Services South Africa 3.33% Nordea NDA SS Equity Diversified Banks Sweden 3.33% CTBC Holding 2891 TT Equity Diversified Banks Taiwan 3.33% Taishin Financial Holding 2887 TT Equity Diversified Banks Taiwan 3.33% Yuanta Financial Holding 2885 TT Equity Investment Banking & Brokerage Taiwan 3.33% Halkbank HALKB TI Equity Diversified Banks Turkey 3.33% Aberdeen Asset Managers ADN LN Equity Asset Management & Custody Banks United Kingdom 3.33% IG Group IGG LN Equity Specialized Finance United Kingdom 3.33% London Stock Exchange LSE LN Equity Specialized Finance United Kingdom 3.33% BlackRock BLK UN Equity Asset Management & Custody Banks United States 3.33% Citigroup Inc. C UN Equity Diversified Banks United States 3.33% Eaton Vance EV UN Equity Asset Management & Custody Banks United States 3.33% Invesco IVZ UN Equity Asset Management & Custody Banks United States 3.33% T. Rowe Price Group TROW UW Equity Asset Management & Custody Banks United States 3.33% * change in FY1 CFROI /CFROE in last 3 months Source: Credit Suisse HOLT, Credit Suisse research

3 Selected emerging and developed market equity plays on the expansion of emerging capital markets We argue that the most effective equity investor participation in the theme of expanding emerging capital markets is a combination of domestic equity plays in select countries which we have identified as offering the greatest opportunities (skewed towards, India, Korea, Brazil, Russia, Taiwan, Saudi Arabia and Indonesia) together with developed market financial sector plays which have relevance for the theme. Credit Suisse launches an equal weighted basket (Bloomberg: CSERECMO Index <Go>) of 3 stocks driven by Credit Suisse HOLT selection methodology to gain exposure to the growth in emerging capital markets out to 23. The Credit Suisse HOLT selection methodology utilises an objective, cash flow based framework for comparing and valuing stocks on a global basis. HOLT makes systematic adjustments to accounting data, enabling companies to be comparable across time, sectors and regions. From a universe of around 22 stocks consisting of both emerging and developed market investment banks, brokerages, asset managers, exchanges and other diversified financial service providers, Credit Suisse selects 3 stocks based on ranks across three HOLT based categories: Operational Quality (a company's track record of generating cash and managing growth, independent of future expectations); Valuation (stock price warranted by the HOLT DCF framework based on consensus forecast cash flows relative to the stock's current market price, as well as HOLT valuation multiples); Market sentiment (measured in terms of revisions to forecast CFROI /CFROE levels and price momentum) The final basket is limited to 2 emerging market names with the remaining 1 constituents populated from developed markets. Those stocks which have an average trading volume of less than US$5m per day over the last six-month period are excluded. In addition, stocks which have ownership and trading restrictions (for example, local listings) are also excluded. Credit Suisse Research Institute 3

4 Table of contents Equity plays on the theme 2 Executive summary 5 Evolution of global capital markets 7 Global equity market expansion from 1996 to 23 9 Corporate bond market expansion from 25 to Sovereign bond market expansion from 25 to Capital markets opportunity in Global debt and equity capital market revenue outlook to Projected equity capital markets revenue to Projected debt capital markets revenue to Total primary capital markets revenue opportunity 52 Growth in secondary equity activity 54 Implications of shifts in emerging market corporate capital structures 59 Emerging debt and equity demand Becoming the world's second largest capital market 69 India 7 Second largest emerging capital market 7 Korea 71 Domestic pension funds sustain demand for assets 71 Brazil 72 A slower growth story than other large EM countries 72 Russia 73 Deals set to accelerate in bonds but stall in equities 73 Taiwan 74 A mature market with further growth 74 Saudi Arabia 75 Liberalisation could drive rapid expansion 75 Indonesia 76 Second fastest growing global capital market 76 Appendix I Methodology 77 Credit Suisse Research Institute 4

5 Executive summary For the most part, emerging nation capital markets remain underdeveloped relative to the size of their economies despite rapid growth in capital-raising over the past two decades. Emerging markets have a 39% share of global output (or 51% on a purchasing power parity basis) and yet account for only 22% of global equity market capitalisation and a 14% share of both corporate and sovereign bond market value, respectively. We believe this gap will close, driven by a disproportionately large contribution from emerging equity and corporate bond supply (as company capital structures increasingly benefit from lower financing costs via disintermediation of bank loans) and by demand (driven by growth in domestic mutual, pension and insurance funds), given relatively high savings ratios prevalent among emerging economies. In this proprietary study, we extrapolate established historical patterns of growth in emerging and developed capital markets to assist in projecting their absolute and relative dimension and composition of market value by the year 23. We find a strong relationship between the historical expansion of developed nation aggregate equity and corporate bond market value relative to GDP and gains in economic productivity; therefore, using long-term projections of per capita GDP, we are able to make projections for both emerging and developed market equity and fixed income issuance over the 17 years to 23. We go on to calculate implied underwriting fees and commissions from primary and secondary capital markets activity, and then we apportion future emerging market equity and fixed income deal revenue between emerging and developed market domiciled financial services companies, employing the evolving observed trends in allocation. We include a flow chart of the methodology used in this report as Appendix I. We estimate the market value for emerging equities, corporate and sovereign bonds increases by US$98trn, US$47trn and US$17trn, respectively in nominal dollar terms between 214 and 23E, versus gains of US$125trn, US$52trn and US$24trn, respectively for these asset classes in the developed world. Hence, we project that, by 23, the emerging market share of global equities increases to 39%, for corporate bonds to 36% and for sovereign bonds to 27%. We anticipate the swiftest 17-year nominal US dollar compound annual growth rate in market value of any asset class to be emerging market equities and corporate bonds at 13% followed by emerging market sovereign bonds at 8%. We forecast developed market equities, corporate and sovereign bonds to grow at a relatively slower pace of 7%, 5% and 3%, respectively. Emerging markets may understandably retain their aggregate equity skew towards resources given their collective characteristic as a net commodity exporter; however, over the duration out to 23, there will likely be a normalisation towards more under-represented industry sectors relative to the developed world, particularly healthcare, industrials and consumer discretionary. We scrutinise the capacity for the growth in assets under management of emerging market domestic mutual, pension and insurance funds to 23 to absorb the incremental equity, corporate and sovereign bond issuance. In total, we forecast this to be US$6trn for equities, US$16trn for corporate bonds, and US$17trn for sovereign bonds. For the most part, we do not foresee the required development of domestic institutional investment assets under management acting as a hurdle to our forecasts for equity and bond new issuance to 23. AUM to GDP ratios for Brazil, Chile, Korea and South Africa would rise as high as 119%, 134%, 135% and 172% by 23E, respectively, under this scenario, yet (with the exception of South Africa) they would remain below current developed world levels. Additionally, sustained foreign portfolio inflows will maintain a further source of demand for emerging market equities and bonds. Should the pace of gross portfolio flows into emerging markets continue to average 1.2% of GDP until 23 (.7% of GDP in gross debt inflows and.5% of GDP in gross equity inflows) then the cumulative inflows into emerging markets over the duration would amount to US$1trn, with fixed income securities accounting for US$6trn of gross inflows and equities the remaining US$4trn. Credit Suisse Research Institute 5

6 With deepening emerging corporate bond markets, we anticipate disintermediation of bank lending to rise as corporates gravitate towards sources of funding which are not only cheaper but also more resilient to the business cycle. Ultimately, this trend in increasing the share of capital funded from corporate bond markets would serve to depress the weighted average cost of capital (WACC) for emerging market corporates thus boosting their return on invested capital (ROIC) less WACC spread which has been buffeted over recent years by a structural weakness in commodity prices, a slowdown in growth and increasing wage pressure in the emerging world. A pick-up in the ROIC less WACC spread from the current lows is a clear positive for emerging markets' equity performance. We highlight below a number of the key statistical conclusions reached in this study: We forecast the US remains the largest equity market in 23 with a capitalisation of US$98trn and a weight of 35% while overtakes both the UK and Japan to become the second largest market with a US$54trn capitalisation and a weight of 19%. The BRICs increase their share of the global equities universe to 26% by the end of 23E, up from 11% in 214E and 2% in Within emerging markets, the BRICs would represent 66% of equity weight in 23E, up from 52% in 214E and 21% in Saudi Arabia, Indonesia and Turkey will undergo a meaningful change in their relative size rankings within emerging markets Saudi Arabia to the sixth largest market from 1 th, Indonesia to seventh largest from 12 th, and Turkey to 1 th largest from 17 th. Countries with the swiftest equity capitalisation dollar CAGR between 214 and 23E are Turkey (17%), (16%) and Indonesia (15%) these growth rates include both the impact of dollar price returns and that of net issuance and inclusions. The largest growth in corporate bond market value we forecast to 23 originates from : from US$3trn in 214E to US$32trn consistent with large-scale disintermediation by Chinese banks of state-owned enterprise and local government assets. An almost doubling of the global sovereign bond market value by 23E to US$84trn from US$43trn in 214 of which 42% of the gain is attributable to emerging markets versus their 17% share in the growth of global sovereign debt from 25 to 214. Cumulatively has accounted for 4% (US$639bn) of the total emerging world equity capital markets deal value (IPOs and SPOs) since 2. Over the next 17 years, we forecast this share to increase to 6% (US$3.6trn or a 5.5-fold nominal increase). Similarly, we forecast 's dominance of corporate bond market deal value over the last 14 years (a 37% share or US$1.6trn of the total) to persist with a leading 53% share (or US$18.4trn) of total emerging market primary activity out to 23E. We estimate a total cumulative secondary equity revenue opportunity of US$392bn in emerging markets and US$827bn in the developed markets between 214 and 23E. We forecast the total capital markets underwriting fees globally for the period from 214 to 23 at US$638bn (in nominal terms) and note a number of key differences with the fees distribution versus the US$37bn earned in the period 2 to 214E. First, fees generated in emerging markets over the next 17 years account for 4% (or US$256bn) of the total versus a far smaller share of 16% (or US$49bn) since 2. Second, within emerging markets, we estimate that the division of fees between equity and debt capital markets until 23 will be much more balanced (49%/51%, respectively) versus that generated from 2 to 213 (67%/33%, respectively). Third, the wallet share of equity and debt capital market fees captured by emerging market local brokers will continue to increase in our view rising from 45% (US$22bn) from 2 to 213 to 58% (US$149bn) between 214 and 23E. We see potential for Brazilian, South African and Russian local brokers to increasingly establish themselves as intra-regional champions winning larger capital market deal fee wallet shares. Credit Suisse Research Institute 6

7 Evolution of global capital markets For the most part, emerging nation capital markets remain underdeveloped relative to the size of their economies despite rapid growth in capital-raising over the past two decades. Emerging markets have a 39% share of global output (or 51% on purchasing power parity basis) and yet account for only 21.6% of global equity market capitalisation and a 14.4% and 13.9% share of the global corporate and sovereign bond market value, respectively. Figure 2: Emerging market share of global GDP (%) 6% GDP (PPP) 5% Figure 3: Emerging market share of global equity and sovereign and corporate bond markets (%) 6% 5% 4% GDP (current dollar) 4% 3% 3% 2% 1% 2% 1% Equity Corporate Sovereign % % Source: IMF forecasts, Credit Suisse research Source: Thomson Reuters, WFE, BIS, Credit Suisse research However, looking forward over the next one-and-a-half decades as far as 23, we believe this gap will close, driven by a disproportionately large contribution from emerging equity and corporate bond supply (as company capital structures increasingly benefit from lower financing costs via disintermediation of bank loans) and demand (driven by growth in emerging country domestic mutual, pension and insurance funds) given relatively high savings ratios prevalent among emerging economies. Moreover, the ability for emerging corporates to access local currency capital markets shields them from the risk of exposure to unforeseen exchange rate volatility. Figure 4: Distribution of non-financial private sector credit (total loans and bonds) for emerging versus developed markets (% bank and non-bank credit) 1% Non-bank (DM) Bank (DM) Non-bank (EM) Bank (EM) 8% 6% 4% 2% % Source: BIS, Credit Suisse research Credit Suisse Research Institute 7

8 South Africa Hong Kong Singapore Brazil Australia Taiwan Switzerland Canada Malaysia Netherlands UK Saudi Arabia India Japan US Thailand France Turkey Poland Chile Germany Philippines Hungary Israel Mexico Peru Indonesia Colombia Spain Korea Italy Russia Egypt 9 July 214 Qualitatively, the eighth pillar of the annual World Economic Forum Global Competitiveness Report charts the progression of financial market development across 148 nations by surveying domestic participants on eight separate concerns. 15 of the 2 largest emerging markets have seen their scores for the aggregate financial market development pillar rise in the eight years between the 26/7 survey and the latest 213/14 edition. The most significant improvement was observed in (the score improved by 1.3 points over eight years) followed by Turkey, the Philippines, South Africa and Saudi Arabia. Meanwhile Hungary and Korea underwent a meaningful deterioration in local perceptions (by.7 and.6 points, respectively) and Russia, Malaysia and Indonesia registered a minimal (.1 point) erosion in domestic opinion. As of the 213/14 survey, South Africa, Malaysia, Taiwan, India, Chile and Saudi Arabia score the highest on domestic perceptions of overall financial market development while Russia, Egypt, Korea, Hungary and Colombia have the least favourable survey results. Figure 5: Emerging financial market development survey* progression from 26 to 214 (sorted by descending score) diff *Note: scores are from 1 (weak) to 7 (strong) Source: World Economic Forum, Credit Suisse research In answer to the degree of effectiveness of regulation and supervision of securities exchanges, South Africa has the most favourable response from its domestic participants of any country globally, with Brazil, Taiwan, Malaysia, Saudi Arabia and India also registering world class scores on this metric (all ahead of both the US and Japan). Figure 6: Global markets regulation of securities exchanges survey* (sorted by descending score) *Note: scores are from 1 (weak) to 7 (strong) Source: World Economic Forum, Credit Suisse research Credit Suisse Research Institute 8

9 Hong Kong South Africa Taiwan US Singapore Australia Malaysia UK Thailand Canada Japan India Saudi Arabia Switzerland Chile Philippines France Indonesia Netherlands Germany Turkey Egypt Brazil Israel Colombia Peru Poland Mexico Korea Italy Russia Spain Hungary 9 July 214 The weakest domestic observations for the regulatory environment for securities exchanges in emerging markets were made in Egypt, Russia, Korea, Colombia and (although we note that these country scores reflected similar opinion in Italy and Spain). On the question of ease for companies to raise money by issuing shares on the local stock market, South Africa, Taiwan and Malaysia again returned a world class score for 213/14 according to domestic participants, with Thailand, India and Saudi Arabia also recording scores higher than some notable European countries including Germany, France and Switzerland. Hungary, Russia, Korea, Mexico and Poland fared less well on the specific topic of listing equity (although generated similar scores to those in Spain and Italy). Nevertheless, encouragingly these survey results suggest that mainstream emerging nations have, for the most part, more than adequately established the necessary institutions and infrastructure (legal, reporting, governance and financial) to grow successfully their capital markets so they may effectively cater to the increasingly demanding financing requirements of their swiftly expanding economies. Figure 7: Global markets financing through local equity market survey* (sorted by descending score) *Note: scores are from 1 (extremely difficult) to 7 (extremely easy) Source: World Economic Forum, Credit Suisse research Global equity market expansion from 1996 to 23 We extrapolate established historical patterns of growth in emerging and developed equity markets to assist in projecting their absolute and relative dimension and composition of equity capitalisation by the year 23. Moreover, we decompose our forecast increase in aggregate common shareholders' equity (book value) to obtain an estimate for net issuance and inclusions, from which we calculate implied underwriting fees and commissions from primary and secondary equity activity. We then apportion future emerging market equity deal revenue between emerging and developed market domiciled financial services companies employing the evolving observed trends in allocation. Identifying the focus of global equity markets within this study This study focuses on a group of 34 countries: 2 emerging markets (19 of which are the largest constituents of the MSCI EM benchmark and, in addition, Saudi Arabia) and 14 developed nations which are helpful for drawing precedents and provide a basis for future relative size comparisons (we include the 13 largest developed equity markets in addition to Israel which was promoted to developed from emerging market status by MSCI in May 21). We have elected to exclude the frontier equity markets from this work (such as UAE, Qatar, Kuwait and Nigeria among the more noteworthy the former two of which were promoted by MSCI to emerging market status in June 214) as in the context of analysis within this study, the necessary historical data are for the most part unavailable. Credit Suisse Research Institute 9

10 We include the A shares market in our analysis with the assumption that the country's capital account liberalises over the duration of the next 17 years thus facilitating foreign access to Chinese domestic equity. However, for the sake of consistency, we have maintained emerging and developed region country definitions throughout although we recognise that, by 23, it is likely that a number of country promotions (from emerging to developed and indeed frontier to emerging status) by index providers (such as MSCI and FTSE) will have taken place. The most significant candidates under consideration are Korea and Taiwan (both under MSCI review for promotion). Magnitude and composition of global equity market enlargement over 18 years Since 1996, global equity market capitalisation (for the 34 countries considered within this study) has grown (in nominal dollar terms) by US$45.2trn (from US$16.6trn to US$61.8trn) at a compound annual growth rate of 7.6%. In aggregate, for the 18-year period over which most country data are available, emerging equity market capitalisation has grown by US$11.6trn from US$1.8trn in January 1996 to US$13.3trn by January 214. The leading contributor has been net issuance and index inclusions of US$6.trn, and price gains realised in local currency terms (driven by delivered and expected discounted cash flows) of US$5.5trn. Cumulatively, over the 18- year duration, the contribution from changes in exchange rates has been comparatively minimal (just US$57bn or.5% of the total). In contrast, the US$33.6trn growth in developed equity market capitalisation over the same period (from US$14.8trn in January 1996 to US$48.4trn in January 214) is mostly accounted for by the contribution from local currency price gains (US$22.7trn or 67% of the total) with net issuance and index inclusions representing US$8.9trn (or 27%) of the gain, and changes in exchange rates a lesser contribution of US$2.trn (or 6%). Figure 8: Decomposition of cumulative gain in emerging world equity market capitalisation since 1996 (US$bn) 1, local currency price gain FX gain 8, Net issuance and inclusions 6, Figure 9: Decomposition of cumulative gain in developed world equity market capitalisation since 1996 (US$bn) 25, 2, 15, local currency price gain FX gain Net issuance and inclusions 4, 1, 2, 5, -2, Jan 96 Jan 99 Jan 2 Jan 5 Jan 8 Jan 11 Jan 14-5, Jan 96 Jan 99 Jan 2 Jan 5 Jan 8 Jan 11 Jan 14 Source: Thomson Reuters, World Federation of Exchanges, Credit Suisse research Source: Thomson Reuters, World Federation of Exchanges, Credit Suisse research The BRIC countries contributed US$6.5trn (or 56%) of the gain in emerging market equity capitalisation since January 1996 but with an 18-year compound annual growth rate of 17.6%, double that of the remainder of emerging markets at 8.9%. The largest single country contributors to the change in emerging market equity capitalisation between 1996 and 214 were (US$3.9trn), India and Korea (both US$1.trn), Brazil (US$.9trn) and Russia (US$.7trn). Credit Suisse Research Institute 1

11 Figure 1: Progression of equity market capitalisation for emerging and developed markets over the past 18 years (in nominal US$ terms) Equity mkt cap (US$bn) Composition of gain in equity mkt cap (US$bn) Contribution to 18-year CAGR (ppt) Country/Region Jan 1996 Jan 214 Total local currency FX move Net issuance/ Total local currency FX move Net issuance/ index price inclusions index price inclusions Brazil , Chile A , , ,68.5 2, Colombia Egypt 11.1* ** 4.3** -2.3** 8.6** Hungary India , , Indonesia Korea , , Malaysia Mexico Peru Philippines Poland Russia 31.8^ ^^ 1.2^^ 1.^^ 19.7^^ Saudi Arabia 45.9* ** 8.2** -.** 6.5** South Africa , Taiwan Thailand Turkey EM Asia 1,18. 8,564. 7, , , EM EMEA , , , , EM Latam ,95.3 1, , BRIC , ,58.6 1, , Australia ,366. 1, Canada , , , France , , Germany , , Hong Kong ,1.8 2, , , Israel Italy Japan 3, , , Netherlands Singapore Spain 29. 1, Switzerland ,54.7 1, UK 1, ,429. 3,99. 1, US 6, , , , , Emerging markets 1, , , , , Developed markets 14, , , , , , World 16, , , , , , Note: * January 1997; ** 17-year CAGR; ^ January 1998; ^^ 16-year CAGR Source: Thomson Reuters, World Federation of Exchanges, Credit Suisse research Despite the larger absolute dollar gains in equity market capitalisation in the developed world, the pace of growth since 1996 in emerging markets has been far swifter an 18- year compound annual growth rate of 11.9% versus a little over half that (6.8%) for developed equity markets. In fact, of the 2 emerging countries in our study, just two Thailand and Malaysia recorded growth in equity market capitalisation at a slower rate than developed equities. Credit Suisse Research Institute 11

12 The swiftest growth in market capitalisation in the timeframe was recorded in the Chinese, Polish, Russian, and Colombian equity markets, all with 18-year compound annual growth rates in excess of 15%. Regionally, growth rates were tightly bunched with Asia leading (12.6%) followed by EMEA (11.2%) and Latin America (1.3%). The greatest skew towards net issuance and inclusion generated expansion in equity markets was in Russia (accounting for 2ppt of the total 22ppt), followed by Egypt, Taiwan, India, Poland and Turkey. Foreign exchange moves had the greatest impact on the 18-year change in equity market size for and Poland (both a positive contributory factor), Turkey, South Africa, Indonesia and India (with the latter four countries negatively impacted by FX moves). Mexico's 1.3% 18-year compound annual growth rate in equity market capitalisation was exclusively generated by local currency equity price gains (driven by earnings growth and multiple expansion) with a negative contribution from the currency, and Mexico was the only emerging market to record negative net issuance and index inclusions over the duration. Figure 11: Emerging market country and region contribution to 18-year CAGR in equity market capitalisation (ppt) Net issuance/inclusions local currency index price FX move Total Source: Thomson Reuters, World Federation of Exchanges, Credit Suisse research Analysing patterns for the growth in equity alongside economic activity Cyclical fluctuations in equity valuation multiples are responsible for swings in the developed world market capitalisation to GDP ratio in the range 6% to 13% over the past two decades. Therefore, the price component must first be normalised in order to establish a more stable historical precedent by which to extrapolate emerging market equity capitalisation using long run projections for GDP. Dividing the market capitalisation to GDP ratio (at annual intervals) by the year-average price to book ratio derives the common shareholders' equity (or book value) to GDP ratio which progressed in a more stable growth trajectory for the developed world over the past 34 years, from 2% to 59%, and in emerging markets over the past 18 years, from 15% to 34%. Credit Suisse Research Institute 12

13 Book to GDP ratio (%) Book to GDP ratio (%) 9 July 214 Figure 12: Emerging versus developed markets equity market capitalisation to GDP ratio (%) 14% Figure 13: Emerging versus developed markets common shareholders' equity (book value) to GDP ratio (%) 7% 12% 1% 8% 6% 4% Developed World Emerging 6% 5% 4% 3% Developed World Emerging 2% 2% % 1% Source: Thomson Reuters, MSCI, Credit Suisse research Source: Thomson Reuters, MSCI, Credit Suisse research Looking at the progression of the book value to GDP ratio for 1 of the more mature developed equity markets over the longer 34-year time horizon (since 198), we can establish a relationship with each country's growth in per capita US dollar economic activity, in purchasing power parity (PPP) terms. Although the ratio of book value to GDP for a given level of per capita GDP and the strength of the relationship between the two metrics differs across the 1 countries, the aggregate relationship over the 34-year duration since 198 for all developed markets is striking: the r-squared is 94% and book to GDP ratio increases at a rate 1.24 times that of the PPP per capita GDP. Extrapolating this relationship using a 23E (Oxford Economics) forecast aggregate per capita GDP (in nominal PPP terms) of US$81,3 suggests a book to GDP ratio of 16%. Figure 14: Developed markets country level common shareholders' equity to GDP ratio versus GDP per capita (annual intervals from 198 through 213) 12% 1% 8% 6% 4% 2% US Japan UK Netherlands Italy Germany France Switzerland Spain Canada per capita GDP (US$ PPP) % 5, 15, 25, 35, 45, 55, Source: Thomson Reuters, MSCI, Oxford Economics, Credit Suisse research Figure 15: Developed markets aggregate common shareholders' equity to GDP ratio versus GDP per capita (annual intervals from 198 through 213) versus emerging markets (intervals from 1996 through 213) 11% Assuming emerging 1% market trend continues to 23 9% Assuming emerging markets follow developed 8% market trend from 214 through 23 7% 6% 5% 4% 3% y = 1.24x R² =.94 Developed markets trend extrapolated from 214 to 23 2% Developed markets y = 3.29x Emerging markets 1% R² =.78 per capita GDP ('s US$ PPP) % Source: Thomson Reuters, MSCI, Oxford Economics, Credit Suisse research Credit Suisse Research Institute 13

14 Book to GDP ratio (%) 9 July 214 Similarly, for emerging markets in aggregate, over a shorter time horizon of 18 years (for which data are available) we find that the book to GDP ratio has grown at a rate 3.29 times that of the nominal PPP per capita GDP, with an r-squared of 78%, again indicating a high level of correlation between the two metrics. However, in our view, this elevated emerging market rate of growth in book value to GDP ratio relative to per capita economic activity is unsustainable for two principal reasons. First, at this rate of growth, extrapolating book value to GDP using a 23E forecast nominal PPP per capita GDP of US$26,5 indicates a ratio of 96%, at almost the level we forecast for developed world equity markets at that point. Second, there were significant capital market reforms across key emerging markets in the early-199s which stimulated a one-off acceleration in equity capital of a magnitude far swifter than the background rate of per capita growth in economic activity (as observed in developed markets) would imply. Larger emerging world capital market reform programmes during the 199s India (with the highest emerging market 18-year growth in book to GDP ratio relative to PPP per capita GDP of 7.4 times) introduced its New Economic Policy in July 1991 heralding de-licensing, deregulation and privatisation of the economy. The wide-ranging reform package included measures to open up most industries to private ownership, allowed foreign firms to own a 51% stake in joint ventures in India and actively promoted divestment of several public sector enterprises. In, the Shanghai Stock Exchange was re-established as recently as November 199 with the Shenzhen exchange opening the following July although ultimately both these developments trace their origins to Deng Xiaoping's long-term economic reform programme launched at the third plenary session of the 11 th party congress in In October 1992, s State Council established the Securities Committee (SCSC) and the Securities Regulatory Commission providing a platform to unlock 's potential growth in listed equity opportunities, its investor base and financial intermediaries. Moreover, the November 1989 fall of the Berlin Wall and ultimately the December 1991 dissolution of the Soviet Union paved the way for the re-emergence of Central and Eastern European capital markets, most significantly the Warsaw Stock Exchange in April 1991 followed by the Russian Trading System in September Figure 16: Emerging markets country level common shareholders' equity to GDP ratio versus GDP per capita (annual intervals from 1996 through 213) 9% Brazil Russia India A 8% Korea Mexico Turkey Poland 7% 6% 5% 4% 3% 2% 1% per capita GDP (US$ PPP) % 5, 1, 15, 2, 25, 3, 35, Source: Thomson Reuters, MSCI, Oxford Economics, Credit Suisse research Credit Suisse Research Institute 14

15 Forecasting equity growth for developed and emerging markets as far as 23 Given the strength in the aggregate relationship between the book to GDP ratio and PPP per capita GDP for developed markets over the past 34 years, we have assumed this growth rate (1.24 multiplier) continues in developed equities until 23. However, at an individual country level (for both emerging and developed markets), we adjust this multiplier according to each country's relative free float versus the developed market average of 88% (i.e. Hong Kong's book to GDP ratio versus PPP per capita GDP multiplier which was the highest among developed markets for the past 34 years in the period from 214 to 23 is assumed to be 1.24 x 88%/52% = 2.1). Notably for Hong Kong, the significant drop in the multiplier is consistent with a liberalisation of 's capital account and therefore a greater propensity for Chinese equity to list domestically. This allows us to translate a 23 forecast nominal PPP GDP per capita of US$81,3 for developed markets into an aggregate increase in common shareholders' equity (nominal book value) of US$59.5trn from US$23.8trn in 214 to US$83.4trn in 23E, with 51% of the incremental gain originating from the US and 7% from each of Hong Kong, Japan and the UK. Figure 17: Historical and projected book value (common shareholders' equity) for developed markets (198-23E) Per capita GDP Book value to GDP ratio Free Book value to GDP Book value (US$bn) ('s US$, PPP) (%) float (%) versus per capita GDP multiplier (x) Country/Region E E E E Australia % 47% 93% 92% ,18.2 Canada % 61% 12% 87% ,72.4 3,751.1 France % 5% 85% 7% , ,559.4 Germany % 29% 73% 77% ,68.2 4,161.8 Hong Kong % 719% 885% 52% , ,196.8 Israel % 41% 94% 75% Italy % 3% 65% 65% ,92.8 Japan % 66% 14% 76% ,33.6 3,79. 7,435.7 Netherlands % 4% 75% 82% Singapore % 183% 287% 59% ,258.9 Spain % 53% 88% 7% ,928.2 Switzerland % 9% 123% 9% ,278.1 UK % 84% 123% 93% ,34.1 6,831.2 US % 52% 17% 95% , , ,415.2 Developed Markets % 59% 15% 88% , , ,378.6 Source: Thomson Reuters, Oxford Economics, MSCI, Credit Suisse research Similarly, we employ the same methodology to extrapolate book value for emerging equity markets given the assumption that, as they mature, the trajectory for equity expansion relative to PPP per capita GDP will more closely reflect that in developed markets. Owing to free floats being lower in emerging markets (in the range 29% to 72%) versus the developed market average of 88%, the multipliers between the book to GDP ratio and PPP per capita GDP are all greater than 1.4 times. A caveat to this elevated expansion of shareholders' equity in emerging markets for a given incremental gain in per capita GDP is that the regulatory environment for emerging capital markets has thus far been relatively benign versus the developed world and in time may become increasingly burdensome thus tempering growth. Credit Suisse Research Institute 15

16 Figure 18: Historical and projected book value (common shareholders' equity) for emerging markets ( E) Per capita GDP Book value to GDP ratio Free Book value to GDP Book value (US$bn) ('s US$, PPP) (%) float (%) versus per capita GDP trend multiplier (x) Country/Region E E E E Brazil % 35% 61% 53% ,969.9 Chile % 55% 117% 39% A % 32% 74% 52% , ,49.3 Colombia % 3% 82% 29% Egypt % 14% 33% 57% Hungary % 18% 54% 6% India % 28% 55% 31% ,122.8 Indonesia % 13% 4% 41% ,44.9 Korea % 87% 157% 65% , ,698.4 Malaysia % 71% 124% 41% ,334.9 Mexico % 15% 42% 59% ,296.8 Peru % 18% 62% 43% Philippines % 32% 57% 29% Poland % 28% 86% 5% ,34.7 Russia % 48% 11% 4% ,825.8 Saudi Arabia % 3% 18% 4% ,349.2 South Africa % 13% 123% 72% ,386.6 Taiwan % 8% 15% 72% ,51.2 Thailand % 42% 96% 34% ,114.9 Turkey % 18% 8% 36% ,8.8 Emerging Markets % 34% 71% 5% , , ,24.5 Source: Thomson Reuters, Oxford Economics, MSCI, Credit Suisse research Global equity market capitalisation and country weights in 23 Having established a 23 forecast for book value across the larger 2 emerging and 14 developed equity markets, this can be converted into an equity market capitalisation by simply multiplying through by the long-term (dependant on availability of earliest historical data) normalised price to book multiple. This suggests a nominal gain in global equity market capitalisation of US$222trn (from US$62trn in 214 to US$284trn in 23). US$98trn (or 44%) of this capitalisation increase originates from emerging markets with the remaining US$125trn (56%) from developed equity markets. This contrasts with the 18-year period from 1996 to 214 when just 26% of the US$45.2trn gain in global equity market capitalisation was attributable to emerging markets with the remaining 74% originating from developed nations. The US retains its ranking as the largest global equity market with a (nominal dollar) capitalisation of US$98trn with a weight of 34.6% (representing a US$74trn gain since 214) while advances ahead of both the UK and Japan to become the second largest equity market with a US$54trn capitalisation and a weight of 18.9% (representing a US$5trn nominal gain from 214). On these estimates, the largest global equity markets in 23 (in excess of US$4trn in nominal equity market capitalisation) have a far more even distribution (eight apiece) across developed and emerging markets than is currently the case, including: Australia, Brazil, Canada,, France, Germany, Hong Kong, India, Indonesia, Japan, Korea, Russia, Saudi Arabia, Taiwan, UK and the US. An equivalent list from today (in excess of US$1.5trn equity market capitalisation) would include eight developed markets (Canada, France, Germany, Hong Kong, Japan, Switzerland, UK and US) but just one emerging market:. Credit Suisse Research Institute 16

17 Figure 19: Equity market capitalisation and regional weight projections for emerging markets in 23 (nominal terms) Country/Region Book value LT median Equity mkt cap (US$bn) Weight within EM/DM region Weight within global equities 23E PBR (x) Jan E 17Y Jan E (%) gain (ppt) Jan E (%) gain (ppt) (US$bn) CAGR (%) (%) Brazil 2, ,2 4, % Chile , % A 39, ,949 53, % Colombia % Egypt % Hungary % India 4, ,139 8, % Indonesia 1, ,38 15.% Korea 4, ,235 5, % Malaysia 1, ,43 9.1% Mexico 1, , % Peru % Philippines , % Poland 1, , % Russia 5, , % Saudi Arabia 2, , % South Africa 1, ,92 6.8% Taiwan 2, ,41 9.2% Thailand 1, , % Turkey 1, , % EM Asia 54, ,564 82, % EM EMEA 12, ,663 18, % EM Latam 6, ,95 9,84 9.% BRIC 52, ,879 72, % Emerging Markets 74, , , % Source: Thomson Reuters, World Federation of Exchanges, Credit Suisse research Figure 2: Equity market capitalisation and regional weight projections for developed markets in 23 (nominal terms) Country/Region Book value LT median Equity mkt cap (US$bn) Weight within EM/DM region Weight within global equities 23E PBR (x) Jan E 17Y Jan E (%) gain (ppt) Jan E (%) gain (ppt) (US$bn) CAGR (%) (%) Australia 3, ,366 5, % Canada 3, ,114 6,62 6.5% France 3, ,138 5, % Germany 4, ,936 6, % Hong Kong 6, ,11 9, % Israel , % Italy 1, ,28 9.5% Japan 7, ,543 13,87 6.1% Netherlands ,34 5.1% Singapore 2, , % Spain 1, ,117 3, % Switzerland 1, ,541 2, % UK 6, ,429 12,569 6.% US 39, ,35 98, % Developed Markets 83, , , % World 157, , , % Source: Thomson Reuters, World Federation of Exchanges, Credit Suisse research Countries with the swiftest equity market capitalisation nominal dollar compound annual growth rate between 214 and 23E are Turkey (16.5%), (15.6%), Indonesia (15.%), Hungary (14.6%), Egypt (13.2%) and Saudi Arabia (13.2%). Meanwhile the laggards include South Africa (6.8%), Colombia (8.1%), Brazil (8.4%), Korea (8.7%), Credit Suisse Research Institute 17

18 CAGR (%) 9 July 214 Mexico (8.9%) and Malaysia (9.1%). These growth rates include both the impact of dollar price returns and that of net issuance and inclusions. However, we note that, for a number of emerging markets (in particular, Poland and Russia), growth rates in the expansion of equity market capitalisation will understandably moderate from levels recorded in the last 16 years (1996 through 214) for the reasons we have stated above. The high forecast growth rate observed for Saudi Arabia would be consistent with a potential liberalisation of the country's equity market, should the Saudi Capital Markets Authority proceed with a reform package by opening its bourse to direct foreign participation, thus creating significant additional external demand for Saudi assets. Figure 21: Equity market capitalisation CAGR for the two periods and E (%, nominal US$ terms) Turkey Indonesia Hungary A Egypt Emerging Markets Thailand Peru Chile EM ex Philippines Malaysia Taiwan Mexico World Korea Brazil Developed Markets South Africa India Saudi Arabia Colombia Russia Poland CAGR (%) Source: Thomson Reuters, World Federation of Exchanges, Credit Suisse research Plotting the 35-year progression of equity market capitalisation in nominal dollars expressed in log terms using historical data to 214 and then interpolating to our forecast for 23 (using the compound annual growth rates) clearly illustrates the slowing growth rate for and India, whereas (in aggregate) the rest of emerging markets and developed markets undergo a mild acceleration. Credit Suisse Research Institute 18

19 Figure 22: Equity market capitalisation progression for developed markets,, India and the rest of emerging markets (log scale, nominal US$bn) 2, DM Figure 23: Global equity market capitalisation progression split by developed markets,, India and the rest of emerging markets (nominal US$bn) 3, 2, EM ex CH & IN India 25, 2, 2, , 1, 5, DM EM ex CH & IN India Source: Thomson Reuters, World Federation of Exchanges, Credit Suisse estimates Source: Thomson Reuters, World Federation of Exchanges, Credit Suisse estimates Hence, we estimate that the weighting of emerging markets within global equities will reach 39.1% in 23 up from 21.6% in 214 and just 1.7% in 1996 with these forecasts unadjusted for free float and any foreign ownership limitation considerations. Within the emerging market universe, Non-Japan Asia increases its share to 74.2% of the total (from 64.3% in 214 and 57.5% in 1996) whereas EMEA and Latin America continue to decline to 17.% and 8.8%, respectively from 2.% and 15.7% in 214 and 22.3% and 2.2% in We estimate that the BRIC countries would increase their share of the global equities universe to 25.6% by the end of 23, up from 11.1% in 214 and just 2.2% in Within emerging markets, the four BRIC countries would collectively represent almost twothirds (65.6%) of equity weight in 23, up from 51.6% in 214 and 2.9% in Figure 24: Regional equity market capitalisation (and global weight) progression from 1996 through to 23E (nominal US$bn, % of total) Developed Markets Emerging Markets BRIC EM Asia EM EMEA EM Latam 1.7% 21.6% 2.2% 11.1% 6.1% 13.9% 2.4% 4.3% 2.2% 3.4% 3.4% 89.3% 6.6% 78.4% 25.6% 29.% 39.1% 6.9% 2, 4, 6, 8, 1, 12, 14, 16, 18, Source: Thomson Reuters, World Federation of Exchanges, Credit Suisse estimates 1996 (label % of total global) 214 (label % of total global) 23 (label % of total global) Credit Suisse Research Institute 19

20 We estimate the largest gains in global equity market weight over the period 214 to 23 will be garnered by (up by 12.5ppt to 18.9%), India (up by 1.3ppt to 3.1%), Indonesia (up by 1.ppt to 1.5%), Russia (up by.9ppt to 2.1%) and Saudi Arabia and Turkey (both by.8ppt to 1.5% and 1.1%, respectively). The only emerging markets to lose global share in equity market capitalisation on our forecasts are South Africa (down by.4ppt to 1.1%), Korea (down by.1ppt to 1.9%) and Brazil (also down by.1ppt to 1.5%). In contrast, with the exception of just Israel and Italy, all other developed equity markets covered in this study are estimated to see a fall in weight. Figure 25: 214 composition of global equity market capitalisation by country (total US$61.7trn) Saudi Arabia Indonesia Turkey.3% Russia 1% 1% 1% Taiwan 1% Others 7% South Africa 2% Brazil 2% Spain 2% India 2% Korea 2% Australia 2% Switzerland 2% Germany 3% Canada 3% France 3% US 39% Figure 26: 23 forecast composition of global equity market capitalisation by country (total US$284.2trn) South Africa Spain 1% 1% Taiwan 1% Indonesia 2% Saudi Arabia 2% Brazil 2% Korea 2% Australia 2% France 2% Russia 2% Canada 2% Germany 2% India 3% Turkey 1% Others 8% Switzerland 1% US 35% Hong Kong 5% A 6% UK 7% Japan 7% Source: Thomson Reuters, World Federation of Exchanges, Credit Suisse research Hong Kong 3% UK 4% Japan 5% A 19% Source: Thomson Reuters, World Federation of Exchanges, Credit Suisse estimates Within the emerging market universe, the transition from a 214 to 23E equity market capitalisation reinforces 's dominant position rising from close to a third (29.6%) of the asset class to almost half (48.2%). Indonesia, Turkey and Saudi Arabia are also forecast to undergo a meaningful increase in their emerging market universe capitalisation weights from 214 to 23E by 1.3ppt, 1.3ppt and.4ppt, respectively to 3.9%, 2.7% and 3.9%. Their relative size rankings also move up a number of positions: Saudi Arabia to the sixth largest market from 1 th, Turkey to 1 th largest from 17 th and Indonesia to seventh largest from 12 th. Other countries moving up the size rankings (but without commensurate gains in weight) are Russia (to third largest from seventh largest principally on account of a forecast normalisation in the current extremely cheap book multiple) and India (to second from third). These gains are principally at the relative expense of Korea, South Africa, Brazil, Taiwan, Mexico and Malaysia which see their emerging market weights drop potentially by 4.3ppt, 4.3ppt, 3.7ppt, 2.5ppt, 1.8ppt and 1.6ppt, respectively. These countries also all accordingly shift down the relative size rankings Korea (by two positions to fourth), South Africa (by four positions to ninth), Brazil (by one position to fifth), Taiwan (by two positions to eighth), Malaysia (by four positions to 13th) and Mexico (by three positions to 11 th ). Credit Suisse Research Institute 2

21 Figure 27: Emerging equity market country weights (by descending size) for 214 and 23E 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % A, 29.6% A, 48.2% Korea, 9.3% India, 8.5% Brazil, 7.7% India, 8.1% South Africa, 7.1% Russia, 5.4% Taiwan, 6.2% Korea, 4.9% Brazil, 3.9% Russia, 5.8% Saudi Arabia, 3.9% Mexico, 3.9% Indonesia, 3.9% Malaysia, 3.8% Taiwan, 3.6% Saudi Arabia, 3.5% South Africa, 2.8% Thailand, 2.7% Turkey, 2.7% Indonesia, 2.6% Mexico, 2.2% Thailand, 2.2% Malaysia, 2.2% Turkey, 1.5% Source: Thomson Reuters, World Federation of Exchanges, Credit Suisse estimates Which emerging market industry sectors will see the highest growth? Emerging markets may understandably retain their aggregate equity skew towards resources (materials and energy) given their collective characteristic as a net commodity exporter; however, over the duration out to 23, there will likely be a normalisation towards more under-represented industry sectors relative to the developed world. Telecoms, materials and information technology are the most over-represented sectors in emerging markets (7.%, 9.3% and 16.8% respectively) relative to developed equities (3.5%, 5.8% and 12.1%). Meanwhile the healthcare industry is particularly underrepresented in emerging markets: just 1.7% of equity capitalisation weight versus 11.6% in the developed world. Industrials (6.5% versus 11.3%) and consumer discretionary (9.% versus 11.7%) are also candidates for greater sector representation within the emerging markets universe using developed market listed equity sector weighting as a helpful precedent. Credit Suisse Research Institute 21