EMERGING MARKETS: NEW ECONOMY OPPORTUNITIES Feng Ding Director, Emerging Markets Equity Global Product Management CFA and Chartered Financial Analyst are trademarks owned by CFA Institute. of For Franklin Financial Templeton Professional Investments. Use Only / Not for Distribution to the Public
Emerging Markets: Why Now?
Politics and Populism across Developed Markets Source: Boris Johnson: http://snappa.static.pressassociation.io/assets/2015/06/17124034/1434541231-dcf7a33bc96928df154a7685e03afadb-600x800.jpg Donald Trump: https://www.donaldjtrump.com/about 2
EM Earnings Power And Cash Flows Continue To Improve Commodity Prices and Exports Supportive of Earnings Turnaround EM Exports, EM Corporate Earnings and Commodity Prices 12/31/2007-12/29/2017 80 60 Exports, World, USD - Emerging Economies MSCI EM (Emerging Markets) - 12 Month Forward Earnings Growth Bloomberg Commodity Index - Price Annual Change % 40 20 0-20 Earnings Growth Exports Commodity -40-60 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 Source : FactSet Research Systems,MSCI, Bloombergrs. Note: Exports are based on the value of goods exported by developing countries and do not include services. Earnings are based on 12-month f Commodity prices are based on the Bloomberg Commodity Index. Last Updated: Exports numbers are the latest as of 09/29/2017, The rest are updated as of 12/29/2017 3
EM Earnings Power And Cash Flows Continue To Improve Free Cash Flow Growth, EPS Growth Asia ex-japan Free Cash Flow 2007 2018E 350 EM Earnings Expectations Rising January 2012 December 2017 20% 300 250 15% USD bn 200 150 100 10% 5% 50 0 2007 2009 2011 2013 2015 2017E 0% 2012 2013 2014 2015 2016 2017 MSCI EM MSCI World For illustrative and discussion purposes only. Past performance is not an indicator or a guarantee of future results. Source: FactSet, BoA Merrill Lynch Global Research, MSCI, IBES estimates. 12 months forward EPS Growth. 4
EM Valuations Cheap Relative to DM But Not Historically P/E NTM 12/31/2007-12/29/2017 12 Months EPS Growth 12/31/2007-12/29/2017 18 16 MSCI EM (Emerging Markets) - Price to Earnings - Next 12 Months - Monthly (Index) MSCI The World Index - Price to Earnings - Next 12 Months - Monthly (Index) Developed Markets: 17.04 35 30 MSCI EM (Emerging Markets) - IBES Aggregates - EPS Growth 12 Month MSCI World Index - IBES Aggregates - EPS Growth 12 Month 25 14 12 10 Emerging Markets: 12.50 20 15 10 EM EPS Growth: 13.05 DM EPS Growth:10.02 5 8 0 6 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17-5 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 Source : FactSet Research Systems, MSCI, Developed Markets as represented by the MSCI World ; EM as represented by MSCI EM; Last Updated:12/29/2017 Source : FactSet Research Systems, MSCI, Last Updated: 12/29/2017 5
Emerging Markets: Flows Flows Accelerating but Remain Muted Relative to History EM Equity Fund Flows 2013 2017 EM Fund Flow Cycles 2003 2017 75 30% 4/9/2003 USD Bn 50 25 0 % of Total Assets 25% 20% 15% 10% 11/3/2004 3/11/2009 12/21/2011 7/13/2016-25 5% -50 2013 2014 2015 2016 2017 0% 0 12 24 36 48 60 72 No. of weeks For illustrative and discussion purposes only. Past performance is not an indicator or a guarantee of future performance. Source: Morgan Stanley Research, Citi Research, EPFR Global. As of December 2017. 6
Emerging Markets: Fed Impact Impact on Emerging Markets Currencies Historically Limited MSCI EM Currency Index January 2015 December 2017 MSCI EM Currency Index June 2003 June 2007 2.0% 1.5% Fed announces unwinding of QE 110 105 100 6.0% 5.0% 4.0% 150 140 130 1.0% 95 3.0% 120 0.5% 90 85 2.0% 1.0% 110 100 0.0% Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 U.S. Fed Funds Rate (LHS) MSCI EM Currency Index (RHS) JPM EM Currency Index (RHS) 80 0.0% Jun-03 Jun-04 Jun-05 Jun-06 U.S. Fed Funds Rate (LHS) MSCI EM Currency Index (RHS) JPM EM Currency Index (RHS) 90 Jun-07 For illustrative and discussion purposes only. Past performance is not an indicator or a guarantee of future performance. Source: FactSet, as of December 2017. See www.franklintempletondatasources.com for additional data provider information. 7
Emerging Markets May Offer Promising Opportunities Rising Wealth Expected to Fuel Strong Growth Prospects Consumption by the Middle Class 1 (USD Trillions) Emerging Markets Emerging Asia Developed Markets 27.9 20.1 20.4 9.5 13.9 4.6 8.0 13.4 13.6 14.1 14.6 14.9 2015 2020 2025 2030 2015 2020 2025 2030 2015 2020 2025 2030 193% Growth Rate 343% Growth Rate 10% Growth Rate For illustrative and discussion purposes only. 1. Source: Brookings Development Indicators, as of June 2016. There is no assurance that any projection, estimate or forecast will be realised. Past performance is not an indicator or a guarantee of future performance. For Professional Investor Use Only. Not for Distribution to Retail Investors. 8
Emerging Markets: New Economy Rising
Technology: Secular Long Term Growth Emerging Markets Most Tech Dominated Index MSCI EM Index Sector Evolution January 2007 December 2017 40 IT Sector Weighting: MSCI Indices December 2011 vs. December 2017 30 35 30 25 20 15 10 5 IT Sector Weighting (%) 25 20 15 10 5 0 2007 2009 2011 2013 2015 2017 Energy/Materials Technology Consumer 0 EM USA Japan Europe Dec-17 Dec-11 For illustrative and discussion purposes only. Past performance is not an indicator or a guarantee of future results. Source: FactSet, MSCI, as of December 2016. MSCI makes no warranties and shall have no liability with respect to any MSCI data reproduced herein. No further redistribution or For use distributors/institutional/professional permitted. This report not prepared or investors endorsed use by MSCI. only. The content of the presentation should not be reproduced /distributed to the public without prior approval 10
Technology Remains Dominant Emerging Vs Developed Markets: Patent Applications % of Total Applications 2006 2016 21.7 50.4 49.6 78.3 Developed Markets Emerging Markets Developed Markets Emerging Markets For Source: distributors/institutional/professional WIPO investors use only. The content of the presentation should not be reproduced /distributed to the public without prior approval 11
Technology Remains Dominant Technology: Rising Innovation No Longer Simply Low Cost Component Manufacturing MSCI EM Index: IT Sub-Sector Evolution December 2007 December 2017 Sub-Sector Weight (%) 30 25 20 15 10 5 Technology Hardware & Equipment Software & Services Semiconductors & Semiconductor Equipment 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 For illustrative and discussion purposes only. Past performance is not an indicator or a guarantee of future results. Source: FactSet, MSCI, as of June 2017. MSCI makes no warranties and shall have no liability with respect to any MSCI data reproduced herein. No further redistribution For use distributors/institutional/professional permitted. This report not prepared investors endorsed use by only. MSCI. The content of the presentation should not be reproduced /distributed to the public without prior approval 12
Consumer: ecommerce Dominance Transformative Impact on Chinese Retail China Top 7 Retailers by Revenue* 2015 USA Top 7 Retailers by Revenue* 2015 For illustrative and discussion purposes only. Past performance is not an indicator or a guarantee of future performance. Source: KPCB; Euromonitor, 2015. Note: *Revenue defined as retail value of goods excluding tax, and excluding certain transaction categories such as consumer-to-consumer, motor vehicles & auto parts, tickets, travel bookings, delivery foodservice, returns, and others, hence may differ from company disclosed total revenue or gross merchandise value figures. 13
Key Emerging Markets Investment Themes Top Themes E-Commerce Continues to Accelerate Investment Ideas E-commerce is still very much a penetration growth story, resonating in several markets including Russia (Yandex) and South Korea (NAVER). Technology Is Reshaping the Global Economy New Mobility Is Disrupting Industries Many EM companies have stepped up to play a dominant role in producing automobile solutions not only in terms of software (Baidu), but also in terms of components including batteries (Samsung Electronics) and tires (Hanook Tire). Fintech Is Driving Financial Institutions Inclusion Penetration Banks are increasing investments into their fintech arms (Itau Unibanco, Ping An Insurance). Favorable demographics of young and growing middle class populations bring opportunities to untapped consumer spending potential. Consumerism, a Play on Demographics Premiumization Looking beyond the penetration story, premiumization is the next natural transition as income rises. Examples include higher-end automobiles (Brilliance China) and leisure (entertainment, resorts, movie theatres, gaming and travel). Shifting Health Care Landscape Demographic shifts and societal changes are intensifying pressures on health care systems, and more hospitals and pharmaceuticals are taking steps to cater to this market (Biocon, Glenmark Pharma). These statements reflect the analysis and opinions of the speaker as of December 2017, and may differ from the opinions of other portfolio managers, investment teams or platforms at Franklin Templeton Investments. Because market and economic conditions are subject to rapid change, the analysis and opinions provided may change without notice. The statements do not provide a complete analysis of every material fact regarding any country, market, industry or security. An assessment of a particular country, market, security, investment or strategy is not intended as an investment recommendation nor does it constitute investment advice. Statements of fact are from sources considered reliable, but no representation or warranty is made as to their completeness or accuracy. 14
Emerging Markets Small Cap
A Wealth of Investment Opportunities EM Small Cap Companies Offer a Broad Set of Options Sizable Investment Universe Broad Opportunity Set Ample Liquidity 23% 18,251 of emerging markets market cap more small cap companies are is comprised of small cap listed than larger cap companies 1 companies 1 US$39bn stocks of small cap companies are traded daily 1,2 1. As of 31 December 2017. Emerging Markets Small Cap companies includes emerging markets and frontier markets within MSCI Emerging Markets and Frontier Markets Index. Small cap companies are defined as those with market cap below US$2 billion. 2. 30-day daily average. Sources: Bloomberg LP; MSCI. Please see Important Disclosures in the back of this presentation for additional information. 16
Complementary to Existing Large Cap Assets Small Cap Companies Offer Different Exposures Sector Exposures As of 31 December 2017 Market Capitalization Exposures As of 31 December 2017 27.7 Market Cap Above $2bn Market Cap Below $2bn 16.6 16.6 14.4 23.5 MSCI Emerging Markets Index 99% 1% MSCI Emerging Markets Small Cap Index 22% 78% 10.2 5.2 12.1 7.4 8.8 8.8 8.7 2.7 2.8 6.9 6.6 4.0 2.4 2.2 6.8 0.9 4.8 Consumer Discretionary Information Technology Industrials Materials Health Care Real Estate Financials Consumer Staples Utilities Energy Telecomm Services MSCI Emerging Markets Small Cap Index MSCI Emerging Markets Index Source: FactSet. 17
Templeton EM Smaller Companies Fund Higher Exposure to Consumer Sectors Sector Exposures As of 31 December 2017 Consumer Discretionary Health Care Consumer Staples 20% 17% 10% 12% 9% 3% 9% 7% 7% Templeton Emerging Markets Smaller Companies Fund MSCI Emerging Markets Small Cap Index MSCI Emerging Markets Index Source: FactSet. 18
EM Small Cap: Stock Inefficiencies Idiosyncratic Returns Medy Tox: Korean Botox Producer 600000 Trimmed exposure during 2015. Dec- 2015: Re-rated to 63x forward PE, with market cap of $2.3bn. KRW 500000 400000 300000 200000 100000 Off benchmark, underresearched, under-owned and undervalued company trading at 13x PE with market cap of $106m Stock added to MSCI EM Small Cap Index in June 2012, trading at 19x forward PE with 90 day ADV of $5m. at purchase. 90 day ADV of Added exposure on weakness during $1.5m. Only 5 local research 2016. Dec-2017: Stock now covered by firms cover stock. 18 sell side analysts, including international firms. 37x forward PE, 90 day ADV of $18m, market cap of $2.4bn. 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 As of December 2017. This is an example of an investment purchased pursuant to investment advice of Templeton Emerging Markets Group; the investment may or may not be currently held by a fund or any investment vehicle advised by Templeton Emerging Markets Group. This is not a complete analysis of every material fact regarding any industry, security or investment and should not be viewed as an investment recommendation. This is intended to provide insight into the advisor s portfolio selection process. The actions taken with respect to this investment and its performance may not be representative of other advice of the advisor or investments of the fund. Factual statements are taken from sources considered reliable, but have not been independently verified for completeness or accuracy by the fund s manager or its affiliates. These opinions may not be relied upon as investment advice or as an offer for a particular security or as an indication of trading intent for any Franklin Templeton fund. All portfolio holdings are subject to change. In addition, it should not be assumed that any securities transactions discussed were or will prove to be profitable. 19
EM Small Cap: Stock Inefficiencies Idiosyncratic Returns Medy Tox: Korean Botox Producer Initial Analysis and Thesis Sources of Potential Upside / Risks Financials/Valuation As of December 2017 Local Innovation One of only seven companies globally with the expertise to produce botox products, both for medical and cosmetic purposes Medy Tox sales have grown to over 30% of Korean market share but only c.3% globally Global botox market exhibiting rapid growth Next generation of product currently undergoing clinical trials International Licensing Licensing agreement with the largest botox product maker, U.S company Allegan, with c.75% global market share Allergan to distribute next generation of Medy Tox products in developed countries once commercialised, expected 2018 / 2019 Company is expanding capacity with third factory to be completed in 2019 Delay in Allergan clinical trials and Hugel lawsuit Recent Weakness Exceptional growth and profitability: Strong quarterly profit growth 45% return on equity, 44% net profit margin Halved shareholdings during 2015 on strength; resumed purchases on cheaper valuations in 2016: Stock de-rated in 2016 from 63x forward PE to 34x by year end 2017/18: Rebound in share price As of December 2017. This is an example of an investment purchased pursuant to investment advice of Templeton Emerging Markets Group; the investment may or may not be currently held by a fund or any investment vehicle advised by Templeton Emerging Markets Group. This is not a complete analysis of every material fact regarding any industry, security or investment and should not be viewed as an investment recommendation. This is intended to provide insight into the advisor s portfolio selection process. The actions taken with respect to this investment and its performance may not be representative of other advice of the advisor or investments of the fund. Factual statements are taken from sources considered reliable, but have not been independently verified for completeness or accuracy by the fund s manager or its affiliates. These opinions may not be relied upon as investment advice or as an offer for a particular security or as an indication of trading intent for any Franklin Templeton fund. All portfolio holdings are subject to change. In addition, it should not be assumed that any securities transactions discussed were or will prove to be profitable. 20
Templeton EM Conclusion Why Emerging Markets? 1. Trump and Fed: Fear and uncertainty passing 2. Fundamentals improving yet valuations still cheap; asset class under-owned 3. EM asset class has transformed: Tech, consumer, healthcare not commodities Why EM Small Cap Asset Class? 1. Vast investment universe, $39bn daily turnover, $6.0tn market cap 2. Under-researched stocks provide opportunities 3. Market inefficiencies, corporate governance risks ideal for active management Why Templeton? 1. Unparalleled on the ground research; 30 years of active EM investing 2. Enhanced team structure and research process 3. Alpha opportunities from inefficient markets and corporate governance focus These statements reflect the analysis and opinions of the speaker as of December 2017, and may differ from the opinions of other portfolio managers, investment teams or platforms at Franklin Templeton Investments. Because market and economic conditions are subject to rapid change, the analysis and opinions provided may change without notice. The statements do not provide a complete analysis of every material fact regarding any country, market, industry or security. An assessment of a particular country, market, security, investment or strategy is not intended as an investment recommendation nor does it constitute investment advice. Statements of fact are from sources considered reliable, but no representation or warranty is made as to their completeness or accuracy. 21
Appendix: Management Profile
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