A LONG-TERM CASE FOR EMERGING MARKETS

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1 A LONG-TERM CASE FOR EMERGING MARKETS An Extraordinary Long-Term Opportunity Emerging markets have displayed significant evolution in terms of economic development and capital markets deepening in the last twenty-five years. After a few years of underperformance, emerging markets have regained strength in 216. Going forward, we believe this area of global capital markets is a compelling opportunity for investors.

2 Increasing Share of Global Wealth A Growth Opportunity Emerging Markets in a Global Context Over the last quarter century emerging markets have evolved to command an increasing share of global wealth. Today, emerging markets represent 85% of the world s population, 57% of its GDP, and 38% of its exports. However, their capital markets are still in development: Emerging markets equity and debt indices represent approximately 1% and 3% of global benchmarks, respectively. GDP (%) Emerging Markets 2 25 Developed Markets E As of October 215 Based on GDP PPP and IMF country groups. Estimated or forecasted data are not a promise or guarantee of future results and are subject to change. Source: Haver Analytics, IMF WEO Emerging Markets Represent 85% of the World s Population and 57% of its GDP, but Only 1% of Global Equity Benchmarks World s Population 85% World s Landmass FX Reserves GDP Energy Consumption Exports Equity Market Cap Debt Market Cap 3% 1% 38% 57% 57% 55% 75% Population, GDP (PPP), and Exports as of 214 based on data released by the IMF World Economic Outlook in October 215; landmass as of 214; FX reserves as of latest data available: 82% of 169 country list as of December 215; energy consumption as of 214; equity market capitalization (float adjusted) based on MSCI ACWI IMI as of December 215; and debt market capitalization based on the sum of J.P. Morgan GBI-EM Global Diversified, EMBI Global Diversified, and CEMBI Diversified indices as a share of Bloomberg Barclays Capital Global Aggregate Bond Index as of December 215. Source: Barclays, Bloomberg, BP MSCI, CIA The World Fact Book, IMF, J.P. Morgan, Lazard, World Bank

3 Demographics and Economic Growth Although there has been a global slowdown in economic growth following the financial crisis, emerging markets are still expected to outpace developed countries in terms of real GDP growth. As emerging markets continue to rebalance their economies over the next few years, we expect this growth to pick up. We believe that, along with demographics, faster economic growth can be a favorable secular trend. Populations in the emerging world are young in most countries, and are in a so-called demographic sweet spot. That is, the dependency ratio (i.e., the ratio of those outside the age range to those aged years) is still in a downward trend for many large emerging countries, such as India, Mexico, Indonesia, and Brazil. In essence, since they have a low dependency ratio, these emerging markets countries will have less government expenditures on social security, health care, and education services used by the youngest and oldest citizens. (%) Emerging Markets Growth Is Expected to Pick Up EM Growth Premium over DM EM Real GDP Growth E As of 12 April 216 Data: GDP (constant prices, p.a. % change). Forecasted or estimated results do not represent a promise or guarantee of future results and are subject to change. Source: Haver Analytics, IMF 221E Emerging Markets Populations Are Younger and Less Dependent than Developed Markets 215 Dependency Ratios (%) Population outside Ages 15 64/Population between Ages India 52.4 Mexico 51.7 Indonesia 49. Brazil 44.7 Russia 43.1 US 5.9 Germany 51.8 Japan 64.5 China 36.6 RATIO DECREASING RATIO INCREASING As of July 215 Estimated or forecasted data are not a promise or guarantee of future results and are subject to change. Source: Haver Analytics, United Nations

4 Growth of the Middle Class In 29, the middle class represented 27% of the world s total population and is expected to reach 42% and 58% by 22 and 23, respectively. With this growth comes an increase in spending power. China and India, with their large populations and economic growth, will not only jump into the top ten, but by 22, will have the top and thirdlargest middle class consumption in the world. By 23, emerging markets will represent six of the top ten countries with the highest middle class consumption. Middle Class Growth Can Lead to Increased Consumption Growth of the Global Middle Class Population (millions) 8,5 6,375 4,25 58% 42% 58% 2,125 73% 27% 42% Middle Class Other 6 out of the Top 1 Countries with the Highest Middle Class Consumption Will Come from the Emerging Markets Middle Class Consumption a by Country 29 22E 23E Country Consumption ($B) Country Consumption ($B) Country Consumption ($B) 1 United States 4,377 China 4,468 India 12,777 2 Japan 1,8 United States 4,27 China 9,985 3 Germany 1,219 India 3,733 United States 3,969 4 France 927 Japan 2,23 Indonesia 2,474 5 United Kingdom 889 Germany 1,361 Japan 2,286 6 Russia 87 Russia 1,189 Russia 1,448 7 China 859 France 1,77 Germany 1,335 8 Italy 74 Indonesia 1,2 Mexico 1,239 9 Mexico 715 Mexico 992 Brazil 1,225 1 Brazil 623 United Kingdom 976 France 1,119 As of July 215 a Based on 25 PPP US dollar Estimated or forecasted data are not a promise or guarantee of future results and are subject to change. Source: Haver Analytics, United Nations

5 Emerging Markets Have Less Debt than the United States, United Kingdom, and Euro Zone Superior EM Debt/GDP Trajectory Superior EM Debt-to-GDP Ratio While US dollar-denominated debt has increased in many emerging countries, emerging markets debt-to-gdp is still less than half that of the United States and lower than the United Kingdom and euro zone. (%) United States Euro Zone E United Kingdom Emerging and Developing Economies As of April 216 Estimated or forecasted results do not represent a promise or guarantee of future results and are subject to change. Source: IMF 221E Financial Productivity (ROE) at a Discount Emerging markets equities continue to trade at a greater than 3% discount to developed markets equities (as represented by the MSCI World Index). Historically, low valuations for the asset class have proven to be attractive entry points for subsequent long-term performance. After peaking in 211 from years of overinvestment and capital misallocation, return on equity (ROE) in the emerging markets has steadily declined, crossing below developed markets ROE levels in 214. Emerging markets ROE recently regained its superiority to developed markets as emerging countries continue to go through the adjustment and rebalancing cycle. Emerging Markets Equities Trade at a 3% Discount to Developed Markets Equities MSCI Emerging Markets Index vs. MSCI World Index ROE (%) P/E Premium/Discount 2 15 MSCI EM Index ROE [LHS] MSCI World Index ROE [LHS] P/E Premium/Discount [RHS] As of 3 September 216 Characteristics shown are calculated on a trailing 1-year basis. Source: Lazard, MSCI

6 A Case for Active Many investors often choose to enter emerging markets through passive vehicles. We believe this approach to emerging markets has several drawbacks. In our view, two of the most prominent are: Passive products track popular benchmarks, which limit the opportunity set; and The cap-weighted nature of benchmarks may lead to unwanted country and sector exposure Passive Investing Can Introduce Unwanted Biases Nearly 5% of the MSCI Emerging Markets Index is composed of financials and technology companies More than 5% of the index is made up of Asian economies, namely China, Korea, and Taiwan Almost 65% of the index consists of large-cap stocks Concentration by sector or country can be even more pronounced from a regional perspective. The MSCI EM Index is Heavily Concentrated in Certain Sectors and Regions Regional Divergence Countries and Sectors LatAm EMEA EM Asia More than 8% represented by 2 countries 4 countries 4 countries 3 largest sectors represent 64% 72% 63% As of 31 December 215 Data are based on MSCI regional indices. Countries LatAm: Mexico, Brazil; EMEA: South Africa, Turkey, Russia, Poland; EM Asia: China, Korea, Taiwan, India. Sectors LatAm: financials, consumer staples, materials; EMEA: financials, energy, consumer discretionary; EM Asia: information technology, financials, consumer discretionary. Source: MSCI

7 Active Management Provides Access to a Wider Opportunity Set Those passive mutual funds tracking emerging markets benchmarks are by extension limited to a narrow subset of emerging companies. More than a decade ago, this may not have been as problematic, as the MSCI Emerging Markets Index included slightly more than one-half of all companies in the opportunity set (MSCI EM Investable Market Index). Today, this figure has dwindled to approximately 3% in other words, passive investing excludes nearly 7% of the emerging markets universe. The EM Opportunity Set Is Significantly Larger than Just the MSCI EM Index Securities 2,8 2,1 1, , , , , ,795 1,813 1, , MSCI EM Index MSCI EM IMI Index 5% As of 31 December 215 Source: MSCI

8 This content represents the views of the author(s), and its conclusions may vary from those held elsewhere within Lazard Asset Management. Lazard is committed to giving our investment professionals the autonomy to develop their own investment views, which are informed by a robust exchange of ideas throughout the firm. Important Information Equity securities will fluctuate in price; the value of your investment will thus fluctuate, and this may result in a loss. Securities in certain non-domestic countries may be less liquid, more volatile, and less subject to governmental supervision than in one s home market. The values of these securities may be affected by changes in currency rates, application of a country s specific tax laws, changes in government administration, and economic and monetary policy. Emerging market securities carry special risks, such as less developed or less efficient trading markets, a lack of company information, and differing auditing and legal standards. The securities markets of emerging market countries can be extremely volatile; performance can also be influenced by political, social, and economic factors affecting companies in emerging market countries. Certain information included herein is derived by Lazard in part from an MSCI index or indices (the Index Data ). However, MSCI has not reviewed this product or report, and does not endorse or express any opinion regarding this product or report or any analysis or other information contained herein or the author or source of any such information or analysis. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any Index Data or data derived therefrom. Published on 22 August 217. This document reflects the views of Lazard Asset Management LLC or its affiliates ( Lazard ) based upon information believed to be reliable as of 17 November 217. There is no guarantee that any forecast or opinion will be realized. This document is provided by Lazard Asset Management LLC or its affiliates ( Lazard ) for informational purposes only. Nothing herein constitutes investment advice or a recommendation relating to any security, commodity, derivative, investment management service or investment product. Investments in securities, derivatives and commodities involve risk, will fluctuate in price, and may result in losses. Certain assets held in Lazard s investment portfolios, in particular alternative investment portfolios, can involve high degrees of risk and volatility when compared to other assets. Similarly, certain assets held in Lazard s investment portfolios may trade in less liquid or efficient markets, which can affect investment performance. Past performance does not guarantee future results. The views expressed herein are subject to change, and may differ from the views of other Lazard investment professionals. This document is intended only for persons residing in jurisdictions where its distribution or availability is consistent with local laws and Lazard s local regulatory authorizations. Please visit for the specific Lazard entities that have issued this document and the scope of their authorized activities. HB27252