Global Emerging Markets

Global Emerging Markets The Second Generation Oliver Bell Head Emerging Markets Specialist Equities 11 November 2008

Why emerging markets? EMERGING ECONOMIES AND DEVELOPED MARKETS AS, % OF THE WORLD 0 20 40 60 80 100 Population Land Mass Foreign Exchange Reserves Energy Consumption Emerging countries influence on developed markets is increasing dramatically There remains a significant mis-match between the scale and potential of the emerging region and their representation in world stock markets GDP at PPP Exports GDP at market exchange rates Market Cap Emerging Markets Developed Markets Source: Merrill Lynch, BP, CIA world factbook, IMF, MSCI, Pictet, May 2007 2

Exceptionally young and rapidly growing population % OF POPULATION IN EACH AGE GROUP 60% 50% 40% 30% 20% 10% 0% MENA India China Europe Japan USA 0-24 25-49 50-74 75+ STRONG POPULATION GROWTH ACROSS THE REGION (YoY) 2.0% 1.7% 1.5% 1.4% 1.1% 1.0% 0.9% 0.6% 0.5% 0.1% 0.0% The MENA region has a youthful population of over 300 million people, which is expanding rapidly Economic activity is set to increase as the younger generations mature into working age, with Egypt alone having 600,000 new members of the workforce each year This will drive MENA s economic growth towards that of India and China and remain significantly higher than the developed world -0.5% -0.2% MENA India World USA China EU Japan Source: World Bank, United Nations Population Division 3

providing the workforce of the future THE DEVELOPED WORLD. POPULATION CHANGE BY AGE GROUP (MILLIONS :2000-2010) EMERGING ASIA EX CHINA. POPULATION CHANGE BY AGE GROUP (MILLIONS: 2000-210) 30 25 20 15 10 5 0-5 -10-15 -20 80 70 60 50 40 30 20 10-25 0-9 10-19 20-29 30-39 40-49 50-59 60-69 70-79 80+ 0 0-9 10-19 20-29 30-39 40-49 50-59 60-69 70-79 80+ Source: United Nations; Hokenson & Company 4

... with lower levels of personal debt HOUSEHOLD DEBT, AS % GDP 100 90 80 Potential for rises in household leverage to further support consumption in emerging markets 70 60 50 40 Average household debt/gdp: Latin America 9.2% 30 20 10 Emerging Europe 12.1% Emerging Asia 27.5% 0 Mature markets 58.0% Source: IMF/Morgan Stanley Research 5 Venezuela Peru Brazil Argentina Colombia Mexico Chile Russia Romiania Turkey Poland Czech Bulgaria Hungary S.Africa Philippine Indonesia India China Thailand Korea Taiwan Malaysia Italy France Japan Germany Spain Australia Ireland N.Zealand U.S,

..and lower leverage at a corporate level too % NET DEBT TO EQUITY (EX-FINANCIALS) 120 100 80 60 40 20 0 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007(e) MSCI EM MSCI WORLD Source: Pictet/Worldscope/Facset/Morgan Stanley Research 6

Emerging markets are resource rich MENA particularly so in hydrocarbons GLOBAL OIL RESERVES (1,208 bn barrels) MENA Europe & Eurasia 12% 66% MENA OIL PRODUCTION (30.2 m barrels / day) MENA Europe & Eurasia 22% 37% MENA accounts for 66% of global oil reserves and 37% of current production S & Cent America North America 5% 9% North America Asia Pacific 10% 17% Saudi Arabia, Kuwait, UAE, Iran and Iraq dominate Africa 5% S & Cent America 8% Asia Pacific 3% Africa 7% GLOBAL NATURAL GAS RESERVES (6,405 trln ft 3 ) MENA Europe & Eurasia 35% Asia Pacific 8% 45% MENA NATURAL GAS PRODUCTION (46.4 bn ft 3 / day) Europe & Eurasia 37% North America 26% MENA 17% MENA accounts for 45% of global gas reserves and over 17% of current production North America S & Cent America 4% 4% Asia Pacific S & Cent America 5% 13% Qatar and Iran dominate Africa 4% Africa 1% Source: BP Statistical Review 2007. Oil figures exclude Canadian oil sands 7

which has resulted in a huge windfalls MARKET VALUE OF THE STOCK OF PROVEN OIL RESERVES ($TR) 80.1 40 20.4 8 4.1 $10 $50 $100 MENA Rest of World 40.7 In 1998 with oil prices at $10 MENA reserves were valued at $8 trillion MENA annual income from Oil exports was $110billon At $100/brl MENA reserves are valued at $80 trillion MENA annual income from Oil exports is $1.1trillon MARKET VALUE OF ANNUAL PRODUCTION ($BN) US$3.0 trillion Natural gas reserves and income are approximately 1/10th of oil income/flows 1,879 For comparison: US$0.3 trillion US$1.5 trillion 940 551 1,101 Total GDP of Africa is $1.3trillion US GDP is $14trillion Total Market Cap of global publicly traded equities is $50trillon 110 188 $10 $50 $100 MENA Rest of World Source: Pictet/BP Statistical Review 2007 8

Improved fiscal discipline and Sovereign Wealth Fund creation CURRENT ACCOUNT AND BUDGET BALANCES HAVE BEEN IMPROVING IN MENA % GDP Total size $bn 25% 20% 15% 10% 5% 0% -5% 1400 1200 1000 800 600 400 200 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 SOVEREIGN WEALTH FUND SIZE ($bn) Others Qatar Algeria Current Account Balance Libya China Kuwait Budget Balance Saudi Arabia Norway Singapore Abu Dhabi Even after the huge increases in regional infrastructure spend, current oil prices have left huge surpluses These surpluses have resulted in a huge improvement in the regional fiscal balances and debt ratios Governments in hydro-carbon rich nations have created Sovereign Wealth Funds to invest these surpluses both regionally and abroad, providing a cushion in case of future oil-price shocks As the credit crunch has decreased global market liquidity, Sovereign Wealth Funds are playing an increasingly important role by taking strategic stakes in high profile companies Source: Pictet/Morgan Stanley 9

Not just in MENA There remains significant policy flexibility for many emerging economies, particularly Asia OFFICIAL FOREIGN EXCHANGE RESERVES FOR EM REGIONS (US$ BN) OFFICIAL FOREIGN EXCHANGE RESERVES FOR EM COUNTRIES (US$ BN, LAST REPORTED) 600 3,500 1457 569 3,000 500 2,500 400 2,000 300 1,500 1,000 79 76 500 6 39 37 34 31 25 20 18 15 33 27 23 22 46 58 102 97 125 158 175 204 296 291 258 0 95 96 97 98 99 00 01 02 03 04 05 06 07 EMEA* ASIA* LATAM* 200 100 0 Russia Poland Turkey Romania Czech Rep. Israel South Africa Hungary Bulgaria Slovakia Croatia China India Taiwan Korea Singapore Hong Kong Malaysia Thailand Indonesia Philippines Pakistan Brazil Mexico Argentina Venezuela Colombia Chile Source: Pictet 10

Rising urban populations is driving secular growth across many emerging markets and will provide a huge stimulus for goods and services Urban population as % of total URBANISATION VS. GDP 100 80 60 Brazil Mexico Russia Malaysia Turkey Hungary Philippines South Africa Indonesia Korea Hong Kong Spain Singapore U.K Australia Canada Germany France Italy Japan US Rapidly growing urban populations across emerging markets requires a significant investment in transportation, power generation and other basic services. Infrastructure investment and rising middle class incomes will continue to provide attractive secular growth across emerging economies 40 20 China Thailand India Vietnam 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 USD nominal GDP per capita (2005) Source: World Bank/Lehman 11

the emerging consumer is becoming a major force AUTO UNIT SALES, ANNUALISED IN MILLION OF UNITS, 3MMA 18 17 16 15 US TOTAL PC SHIPMENTS MILLIONS OF UNITS, LAST 4 QUARTERS 80 70 60 4.0 3.5 3.0 The shift to domestic demand growth in emerging markets has begun 14 13 12 11 10 9 8 Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 US May-07 Jul-07 BRICs BRICs Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 50 40 30 20 10 0 1996Q1 1996Q3 1997Q1 1997Q3 1998Q1 1998Q3 1999Q1 1999Q3 2000Q1 2000Q3 2001Q1 2001Q3 2002Q1 2002Q3 2003Q1 2003Q3 2004Q1 2004Q3 2005Q1 2005Q3 2006Q1 2006Q3 2007Q1 2007Q3 2008Q1 USA to A/P ex Japan Ratio (RHS) Asia Pacific ex Japan (LHS) USA (LHS) 2.5 2.0 1.5 1.0 0.5 0.0 Emerging market domestic demand is displacing the US as the driver of key product categories (cars and PC for example) Source: Bloomberg, Haver, Morgan Stanley, IDC 12

..and will be accompanied by booming infrastructure spend ELECTRICITY GENERATION CAPACITY IN EMERGING MARKETS 1990-2030e Electricity Generation (TWh) Growth (%p.a) Source 1990 2004 2015e 2030 2004-2015e 2004-2030 Installed electricity capacity in the emerging markets is forecast to rise by 90% to 2015 Total Generation 2,321 5,754 10,749 17,001 5.8 4.3 Coal 917 2,753 5,659 8,979 6.8 4.7 Oil 366 580 670 616 1.3 0.2 Gas 257 983 1,955 3,389 6.4 4.9 Nuclear 57 142 322 523 7.7 5.1 Hydro 709 1,239 1,928 2,827 4.1 3.2 Other Renewable 15 57 215 667 13.0 10.0 By 2015 installed electricity capacity will be double that of the US Source: International Energy Agency, Morgan Stanley Research. 13

as witnessed in MENA ANNOUNCED INFRASTRUCTURE SPENDING BY COUNTRY ($BN) Infrastructure spend ($bn) 10 0 0 900 800 700 600 500 400 300 200 10 0 0 Bahrain Iraq Oman Qatar Kuw ait Iran Saudi Arabia UAE BUDGET BREAKEVEN OIL PRICES FOR MAJOR PRODUCERS ($ barrel) $2.5 trillion of infrastructure spending has been announced in the MENA region, $1 trillion will be spent in the next five years At current prices MENA reserves are valued at $65 trillion and MENA annual income from Oil exports is $800 billion 75% of planned infrastructure spend will be in non-hydrocarbon related sectors as regional governments seek to diversify their economies Oil price $ per barrel 60 50 40 30 20 10 Current budgeted infrastructure spend is sustainable with oil remains above $50 a barrel Additional petrodollar liquidity is being invested in North African projects as GCC states take advantage of the favourable demographics in this region 0 Kuwait UAE Qatar Libya S Arabia Russia Algeria Mexico Venezuela Iran Source: MEED/UBS estimates 14

All of which contributes to strong economic growth GDP PER CAPITA 25000 20000 15000 10000 5000 0 GCC Eastern Europe Latam MENA Asia ex Japan REAL GDP GROWTH (% YOY) 12% 10% 8% 6% 4% 2% The hydrocarbon windfall in the GCC has led to huge increases in GDP per capita, with Qatar projected to exceed $100,000 next year Although regional GDP per capita still lags emerging market counterparts, the sustained growth in non-oil countries has resulted in large increases in absolute GDP per capita that are set to continue Additionally, as the results of increased infrastructure spend and a rapidly maturing population begin to be seen, real GDP growth rates should approach India and China 0% MENA Euro Area Japan United States World India China Source: IMF/World Bank 15

Non-oil growth is now outpacing oil growth GROWTH IN MENA REGION OIL VERSUS NON-OIL COUNTRIES (% YOY) 12% 10% 8% Non-oil MENA countries are growing just as significantly as their oil-rich peers regionally, a trend that is set to continue 6% 4% 2% 0% 2003 2004 2005 2006 2007F 2008F Non-oil countries Oil countries Even in the oil-rich MENA region, nonoil sector growth has exceeded and is projected to continue to outpace oil sector growth as countries continue to diversify their economies MENA OIL & NON-OIL SECTORS REAL GDP GROWTH (%) 15% 13% 11% 9% 7% 5% 3% 1% -1% 2003 2004 2005 2006 2007F 2008F Non-Oil Sectors Oil Sectors Source: IMF/Morgan Stanley/UBS 16

Asia is the major contributor to global growth in 2008 ESTIMATED CONTRIBUTION TO 2008 GDP GROWTH 40 35 30 25 20 Emerging economies expected to contribute over 50% to global growth in 2008 Emerging economies to remain a significant motor to global growth over the coming years 15 10 5 0 UK Japan Other advanced Latin America Rest of the world Emerging Europe/Africa Euro Area USA Emerging Asia Source: Pictet 17

A consumer and an Asian bias in the EM smallcap universe STOCK ALLOCATION ACROSS SMALL CAP AND GEM UNIVERSE Security Small Cap GEM Energy 2.10% 15.70% Materials 13.70% 12.10% Industrials 15.90% 7.60% Cons. Disc. 15.50% 5.00% Cons. Staples 9.10% 5.30% Healthcare 5.40% 2.50% Financials 19.80% 22.30% I.T. 14.20% 12.60% Telecoms 1.30% 13.00% Utilities 2.80% 3.70% Latin America 11.30% 20.80% Emea 20.00% 22.40% Asia 68.40% 56.80% 70% of GEM Small cap universe is in Asia 60% of the small cap universe is leveraged to domestic demand (consumer discretionary, consumer staples, financials and small-cap industrials) >50% of the MSCI EM Core are leveraged to global demand (energy, materials, IT and largecap industrials) Large cap industrials and large cap consumer discretionary are more likely to have meaningful global exposure, whilst small cap industrials are mostly domestically orientated Source: Pictet 18

EM Small Caps and MENA companies are less researched ANALYST COVERAGE* OF EM INDICES, MSCI EM SMALL CAP VS. MSCI EM MSCI EM Small Cap MSCI Arabia MSCI EM Average coverage 4.83 4.46 10.24 % with coverage 67% 65% 92% *Stocks with IBES estimate for 2008 as of May-19-2008 Emerging Small caps are defined as those companies with a market cap < USD 3bn and/or those companies within the new MSCI Small Cap index These emerging small caps are less researched by brokers analysts and therefore less efficiently priced Source: Merrill Lynch estimates/ibes/mena- Pictet Estimates, May 2008 19

MENA and EM Small Caps have a lower correlation to GEM and World markets 20 WEEK CORRELATION, SINCE MARCH 2006 Correlation with MSCI World 100% 90% 80% GEM Smallcap 70% 60% 50% 40% 30% 20% MENA 10% 0% -30% -20% -10% -10% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100-20% % -30% Correlation with MSCI Emerging Markets MENA GEM Core GEM Smallcap Global Emerging Markets show high levels of correlation with MSCI World, EM Small caps less so MENA markets have a low correlation with both due to different growth drivers and low foreign participation. They also exhibit low correlation with the price of oil (0.10) Straight minimum and maximum trailing P/E s and trailing P/B s by sector for EM small cap and EM core indices indicate much larger dispersion and therefore opportunity within the small caps Source: Pictet/MSCI, March 2008 20

and are moving from off benchmark to on benchmark. CREATION OF THE NEW SMALL CAP INDEX Core Standard Index (MXEF/EEM) about 850 stocks + Small Cap = Total EM Universe Enhanced Standard Index about 850 stocks KEY CONSTITUENTS OF THE MSCI EMERGING MARKETS INDEX ($3,410BN) MENA adjusted including Saudi India South Africa MENA adjusted 5.4% 6.6% 7.0% 10.3% (equals Large + Mid Cap Indices) Mexico Malaysia 2.4% 5.0% Thailand 1.5% Enhanced Small Cap Index with 1400 stocks Enhanced Small Cap Index with 1400 stocks MENA current Turkey 1.3% 1.2% 0% 2% 4% 6% 8% 10% 12% The new MSCI small cap index comprises 1400 stocks with a combined market cap of USD 859bn (mean market cap USD 652m, freefloat market cap 303m) and covering about 15% of the market cap of the emerging markets universe. The Middle East and Africa is currently under-represented in Emerging Market indices at only 1.3% of the total index. If the index was adjusted to represent the current investable market capitalisation for foreigners, this share would rise to 5.4% Source: Pictet,/MSCI April 2008/Shuaa Capital 21

Savings deposits in Asia are large relative to the size of stock markets and small cap is very under represented SAVINGS DEPOSITS TO MARKET CAPITALISATION (X) GROSS DOMESTIC SAVINGS AS % GDP China (free float) China (total market cap.) 50 45 40 Korea 35 30 Japan Singapore 25 20 15 India 10 5 US 0 2 4 6 8 0 China Malaysia Korea Hong Kong Thailand India Indonesia Asia Taiwan Singapore US Philippines Source: CLSA Asia Pacific Markets Source: Asian Development Bank/CLSA China mainland stock market still relatively small compared to bank deposits. Deposits are seven times greater than the value of the A share free float. Best practice pension funding has also been adopted by many emerging markets e.g., Poland, Chile. This in turn provides strong and steady domestic demand for emerging equities. As with the core index the small cap index can be split by country and region. This gives domestic investors a new benchmark to be measured against, further encouraging an allocation to the small cap asset class. 22

MENA has attractive valuations and growth VALUATION MATRIX as at 28/05/08 & 06/10/08 Current Account / GDP Balance 50% 40% 30% 20% 10% 0% -10% Oman Kuwait Kuwait UAE China Qatar UAE Oman Russia Russia EM Egypt Egypt EM World World Morocco Morocco 0 5 Brazil 10 India15 Brazil 20 India 25 30 USA USA P/E Qatar China PE_RATIO 06/10/2008 PE_RATIO 28/05/2008 Low Price/Earnings (PE) and High Current Account Surplus/GDP indicate attractive markets Aggregate PE ratios are below other Emerging Markets, but still with superior earnings growth (20-25%) and ROEs of over 20% Data as of October 2008 Source: Pictet/MSCI/IMF/Local Exchanges/Renaissance Capital 23

having corrected from excesses STOCK PRICES ARE BACK IN LINE WITH EARNINGS GROWTH 500% 450% 400% 350% 300% 250% 200% 150% 100% 50% Stock market bubble Earnings growth in MENA has been significant over the last 7 years The GCC stock markets in particular got ahead of themselves in 2005 the market corrections in 2006 brought stock prices back in line with the earnings growth The stock market is now lagging the expected earnings growth 0% 2001 2002 2003 2004 2005 2006 2007 2008E Earnings Arabian Index Source: SHUAA Capital/Morgan Stanley 24

Small caps at a discount to GEM Core with better growth too RELATIVE TRAILING P/E OF MSCI SMALL CAP EM/EM RELATIVE P/B OF MSCI SMALL CAP EM/EM EM Small caps trade at a slight P/E discount to GEM Core, at 7.6x and are at a 40% P/B discount, at 0.8x EM Small cap 12 month forward growth of 16% is superior to GEM core of 9% with similar ROEs of 15% Source: Merrill Lynch estimates, MSCI 25

Emerging Markets Small Caps have underperformed RELATIVE PERFORMANCE EM SMALL CAPS VS. EM LARGE CAP & US SMALL CAP VS. US LARGE CAP 200 180 160 140 120 100 80 60 Small Small cap outperforms Cap outperforms Large cap outperforms Large cap outperforms In contrast to developed markets where small caps have outperformed the larger caps, in Emerging Markets the small caps have lagged. Cross-over money has preferred the large liquid names Commodities related companies are more represented in the larger cap universe M&A in EM not such a big factor yet Oct-98 Oct-00 Oct-02 Oct-04 Oct-06 Oct-08 EM World Source: Citi Research 26

and Asian equities are well positioned to reverse recent underperformance against other emerging markets MSCI ASIA EX-JAPAN PERFORMANCE RELATIVE TO MSCI EMERGING MARKETS 0.75 Asia equities have lagged behind the strong gains from Latin America and EMEA over the last four years 0.70 0.65 0.60 Earnings and macroeconomic risk is lower in Asia than other emerging regions 0.55 0.50 0.45 Moderation in energy and commodity prices would significantly improve terms of trade for many Asian countries 0.40 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: Pictet/Datastream 27

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