THE CASE FOR EMERGING MARKETS INVESTMENTS

Transcription

1 THE CASE FOR EMERGING MARKETS INVESTMENTS

2 Brazil

3 WAKE UP AND SMELL THE COFFEE... Emerging markets are exciting, dynamic and in the hands of skillful investment managers, have the potential to be very profitable a situation that, as investors, we need to be aware of. Thinking of the coffee metaphor, where was your morning cup from? As a consumer nowadays you have the choice of some exotic types from far-flung emerging markets, where countries have both appropriate resources and dynamic businesses poised to take advantage of this vast global market. The chances are, even if you re fairly conservative in your selection, your drink may well have originated in Brazil the world s largest coffee producer and exporter for the last 150 years. Coffee plantations, covering 10,000 square miles, are mainly located in the south-eastern states of Minas Gerais, São Paulo and Paraná where the environment and climate provide ideal growing conditions. We should all be waking up to the exciting potential of emerging markets and the importance of an appropriate allocation within our investment portfolios. The economic conditions and resources available in the emerging markets are perfectly suited to creating dominant companies in many markets on a global scale. Past issues across these territories are being lessened and removed as policy reforms bite and companies tighten their business models, create strong brands and turn to the global stage rather than being domestic market focused. In addition, as emerging market nations grow rapidly vast new consumer bases are also being created off the back of new-found prosperity. Read on for our five top reasons to consider investing in emerging markets.

4 1 ECONOMIC GROWTH AND ATTRACTIVE VALUATIONS Emerging markets display healthier, sometimes attention-grabbing, economic growth than the developed world in the main. This has been one of the stand-out features for a long time and often cited in the list of advantages to investing in the region. As with all markets, macroeconomic risk is present but we typically see resilience displayed by these markets when they are shocked by external events and factors. While there is always a reaction, there is a rapid return to normality, underpinned by the strong fundamental economics. These vibrant economies support key growth engines enabling companies to become global winners and promoting the growth of the emerging market consumer. Attractive Market Valuations As investors the most important thing we are seeing is that finding investments to benefit from these favorable economic conditions, together with the corporate growth that they foster, is available at a healthy discount to what we would pay for equivalent investments in the developed markets. This can be seen very clearly in the huge price-to-earnings differential shown in the graphic. Most importantly, this is a scenario that we see as sustainable continuing attractive valuations will encourage foreign investment and should support the region s economic growth and demographic development on an ongoing basis. Emerging Markets and Developing Economies vs. Advanced Economies 1 Annual Real GDP Growth (%) E 6% 4% 2% 0% E 2018E 2019E Advanced Economics Emerging Markets and Developing Economies Past performance is not an indicator or a guarantee of future performance. Price-to-Earnings Ratio (LTM) Comparisons 2,3 As of 31 December Emerging Markets < 21.9 Developed Markets 18.5 Developed Markets ex-u.s. 1. Source: International Monetary Fund, World Economic Outlook Database, April The Price-to-Earnings (P/E) Ratio measures the forward P/E, based on earnings forecasted for the next 12 months (NTM). 3. Source: MSCI via FactSet. Emerging Markets are represented by the MSCI Emerging Markets Index, Developed Markets are represented by the MSCI World Index and Developed Markets ex-u.s. are represented by the MSCI World Index excluding USA GR USD Index. 2 The Case for Emerging Markets Investments franklintempleton.lu

5 2 THE TECHNOLOGY REVOLUTION Technology marches on there s no getting away from it, nor from the daily advances which now affect our lives so deeply. Companies in emerging markets are at the forefront of this drive, whether as the end-provider of consumer and industrial technology products and services, or as the supplier of the components and building blocks for developing technologies such as autonomous driving many of the camera and control chipsets central to the control systems originate from companies in the emerging markets. Leading Smartphone Sales (Units Sold in Millions) E 1, E Developed Markets Emerging Markets Technology and the internet, in particular, are enabling the rise of emerging markets companies and also providing a platform for dynamic entrepreneurial businesses to succeed on the global stage. Even your smartphone a device now found in most pockets was likely assembled in the emerging markets, even if not designed there. Half a million iphones are produced each day in the so-called iphone City in Zhengzhou, China. Emerging markets are also at the forefront of transformational technologies such as artificial intelligence, robotics and supercomputers. MSCI EM Sector Evolution 5 December 2006 December % 30% 20% 10% 0% Energy/Materials Information Technology Consumer Past performance is not an indicator or a guarantee of future performance. The Internet Effect As an indication of this explosive growth in the emerging markets, India recently sped past the U.S. to become the world s second largest internet user market behind the emerging market giant, China. A perfect example of the enabling power of the internet also creates new domestic consumer bases in the emerging markets boosting both local economic growth and the revenues of those companies supplying the required goods and services. Top 3 Countries by Internet Users 6 China 721,434,547 India 462,124,989 USA 286,942, Source: Gfk Point of Sales (POS) Measurement data in 75+ markets. Monthly data to the end of May 2017, plus weekly data to 24 June Percentages are rounded. 5. FactSet. As of 31/12/ Source: Internet live stats, based on finalized internet user number for franklintempleton.lu The Case for Emerging Markets Investments 3

6 3 THE VALUE OF ACTIVE MANAGEMENT There is an enduring danger which lurks beneath the surface with emerging markets investing that of following the index. The largest countries and companies are so dominant that simply investing in line with index proportions has hidden pitfalls of unwanted portfolio concentration and associated risk. The Sector Comparison and Growth Drivers Across Emerging Market Regions Vary Significantly 7 As of 31 December % 30% 23% 14% 10% 6% 15% 5% 9% 5% 16% 11% 19% 11% 1% 1% 1% 0% 0% 0% Consumer Staples & Discretionary Energy Information Technology Materials Asia Latin America Europe Arabian Markets Africa Past performance is not an indicator or a guarantee of future performance. This is why we employ active management to uncover the best opportunities our analysts and managers across the globe can trawl far beyond the index to find the farthest-flung opportunities usually exhibiting deeper value. Most often we now see these opportunities coming from medium- and smaller-sized companies and further off the beaten track in the frontier markets less established than emerging markets but with rewarding growth potential for those who can successfully navigate the associated risks. The low correlation of frontier markets with other global markets is a further benefit, adding additional diversification. 7. Source: FactSet, MSCI. Sector weights are based on the MSCI EM Regional Indexes: EM Asia, EM Latin America, EM Europe, MSCI Arabian Markets and MSCI Frontier Markets Africa. Indices are unmanaged and one cannot invest directly in an index. 4 The Case for Emerging Markets Investments franklintempleton.lu

7 What s more, the changeable landscape of the emerging markets means that active investing is paramount in order to avoid getting stuck in yesterday s big story as the table shows, the tides of winners and losers change regularly and to stay anchored could be problematic. MSCI EM Index and Its 23 Individual Constituency Countries 8 Calendar Year Returns (USD) (%), United Arab Emirates 90.0 Egypt 29.3 Hungary 36.3 Brazil 66.7 Poland 55.3 Top 3 Performers Greece 52.7 Indonesia 27.2 Russia 5.0 Russia 55.9 China 54.3 Qatar 30.0 Philippines 26.4 India -6.1 Peru 55.6 Korea 47.8 EM Index Indonesia Hungary Brazil Mexico -9.0 United Arab Emirates 2.9 Bottom 3 Performers Turkey Greece Colombia Egypt Qatar Peru Russia Greece Greece Pakistan Past performance is not an indicator or a guarantee of future performance. 8. Source: Morningstar Direct. franklintempleton.lu The Case for Emerging Markets Investments 5

8 4 FAVORABLE DEMOGRAPHICS Populations around us, communities through to cities, are evolving rapidly, permanently changing the economic landscape. Ongoing demographic changes in the emerging markets are so substantial that they are likely to be recorded as a significant period of human history. Mass urbanization is transforming emerging markets. By 2025, emerging markets will be home to over three-times the urban dwellers as the developed world. By 2050, it will be close to five-times. This will both fuel productivity and at the same time feed the boom in domestic consumer bases new urbanites with new incomes, looking to create the lifestyles they aspire to. 6 The Case for Emerging Markets Investments franklintempleton.lu

9 Emerging Markets also have a younger population with lower dependency, while developed market populations are aging at a faster rate. By 2030, 86% of the global working age population will live in Emerging Markets. Urban Population Growth 9 in Billions 7 6 This paints a very clear picture of the potential for market dominance for those companies that can stay on top of this global trend appropriately siting R&D and manufacturing centers whilst building brands that appeal to a burgeoning local consumer market as well as the global marketplace World Emerging Regions Developed Regions World Population Emerging Markets vs. Developed Markets , in Millions Emerging Markets Developed Markets Male Female Male Female 9. United Nations, Department of Economic and Social Affairs, Population Division (2014). World Population Prospects: The 2014 Revision, CD-ROM Edition as of June United Nations, Department of Economics and Social Affairs, Population Division (2017). World Population Prospects: The 2017 Revision, CD-ROM Edition as of June franklintempleton.lu The Case for Emerging Markets Investments 7

10 5 THE EMERGING CONSUMER Economic growth is putting money in people s pockets and, by the power of human nature, those people will consume more products and services, in turn driving local market growth. It s a very simple dynamic when incomes increase even the most frugal person will usually start increasing their standard of living. History has seen this pattern many times in different countries. As productivity increases, jobs boom. Wages climb to attract and retain the best talent and people seek education so they can compete for those jobs. All this fuels growth probably all the way to a developed economy. As these consumers earn more, they will be compelled to spend some of that new found wealth on their families lifestyles. Consumers will also follow buying trends which emerge, a psyche that marketers are only too eager to cash-in on. Internet and technology (read mobile in particular) are also working their magic internet allows consumers to access global brands in a way that wasn t available a decade or so ago, with mobile making it more accessible. DRIVING LOCAL MARKET GROWTH Annualized Gross National Income (GNI) per Capita Growth 11 ( ) Developed Markets 2.7% Emerging Markets 5.1% Emerging Asia 4.7% Past performance is not an indicator or a guarantee of future performance. Consumption by the Middle Class 12 Cumulative Growth USD Trillions Developed Markets 10% Emerging Markets Emerging Asia 193% 343% Growth Rate Growth Rate Growth Rate 11. Source: World Development Indicators Database, World Bank as of 15/01/2018. Most recent data. Gross National Income (GNI) is measured on a per capita basis and the total calculation is an equally weighted average of the EM and DM respective universes. 12. Source: Brookings Development, Aid and Governance Indicators: Raw Data as of January The Case for Emerging Markets Investments franklintempleton.lu

11 SPECIALIZED EXPERTISE IN EMERGING MARKETS INVESTING We have described the vast geographical scale of the emerging markets and spoken of Franklin Templeton s excellence in active management of emerging market assets. But, how exactly do we go about it? At the heart are Franklin Templeton Emerging Markets Equity and Templeton Global Macro Group covering respectively equity and fixed income side of emerging markets investing. Both leveraging a distributed research teams with unparalleled local presence. This is what distinguishes us from other emerging markets managers we believe this local access is critical and it is absolutely central to our investment process. Macroeconomic risks aside, the greatest risks in emerging markets investing are embedded in the business models of target investments. This is why the access is so important truly understanding each company, its business model and perhaps most importantly, the individuals in charge and their attitudes. Entrust Franklin Templeton with looking after your emerging markets investments to gain immediate and lasting access to the skills, knowledge and experience of this much-respected resource. Franklin Templeton Emerging Markets Investment Offices 13 YEAR TRACK REGIONAL RECORD OFFICES INVESTMENT PROFESSIONALS AMERICAS 4 LOCATIONS Our local presence enables analysts to conduct 2,000 2,500 in person company visits per year BUENOS AIRES Argentina RIO DE JANEIRO SÃO PAULO Brazil NEW YORK USA EUROPE MIDDLE EAST AFRICA 7 LOCATIONS VIENNA Austria FRANKFURT Germany WARSAW Poland BUCHAREST Romania CAPE TOWN South Africa ISTANBUL Turkey DUBAI UAE ASIA- PACIFIC 9 LOCATIONS CHENNAI HYDERABAD MUMBAI India KUALA LUMPUR Malaysia SEOUL South Korea BANGKOK Thailand HO CHI MINH CITY Vietnam HONG KONG SINGAPORE 13. Source: Franklin Templeton Investments (FTI). Expected as of 31 March Investment professionals include research analysts, portfolio managers, directors and CIO.

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