The Case for the Emerging Markets Consumer and Their Impact on Pension Investments October 2013
Emerging Markets Consumer Overview Today, we will examine: Case for Emerging Markets Consumer changes in GDP composition rapidly expanding size of the middle class higher income and lower debt increasing discretionary spending Perhaps most importantly: Impact on Pension Investments how was the market reacted to these changes? why is a traditional allocation to emerging markets suboptimal? how does this impact pension investments? 2
Case for Emerging Markets Consumer
Emerging Markets: Driving Global Economic Growth Contribution Share to Global Economic Growth (Nominal GDP) Developed Economies Emerging Economies Emerging Markets Have Eclipsed Developed Markets in the Contribution to Global Economic Growth * Projected Source: IMF, Allianz Global Investors U.S. LLC ; see additional disclosure 4
Emerging Markets: Becoming Anchors Of Stability Developed Markets Emerging Markets Jan-07 Dec-12 Country Rating Outlook Rating Outlook USA AAA stable AA+ negative Jan-07 Dec-12 Country Rating Outlook Rating Outlook China A stable AA- stable Belgium AA+ stable AA negative Brazil BB positive A- stable New Zealand AA+ stable AA+ stable India BB+ positive BBB- negative Spain AAA stable BBB+ negative Poland BBB+ stable A stable Japan AA- positive AA- negative Peru BB+ stable BBB+ positive Italy A+ stable BBB+ negative Turkey BB- stable BBB- stable Israel A+ stable AA- stable Taiwan AA- negative AA- stable Ireland AAA stable BBB+ negative Philippines BB- stable BB+ positive Portugal AA- stable BB negative Chile A positive AA stable Greece A stable B- stable Columbia BB positive BBB+ positive Upgrade / Positive Downgrade / Negative Emerging Markets Are In A Stronger Position Today Than Before The Economic Crisis Source: Standard & Poor's; Allianz Global Investors U.S. LLC ; as of December 31, 2012 5
Annual Change (%) Emerging Markets: Expected to Lead Global Growth Developing countries account for a larger portion of global GDP United States European Union Central and Eastern Europe Latin America and the Caribbean Emerging and Developing Economies 12 IMF Forecast 10 8 6 4 2 0-2 -4-6 1996 2000 2004 2008 2012 2016 Emerging Market Growth Forecasts Outpace Other Regions Source: JP Morgan 6
GDP Percentage Composition GDP Growth Rate New Era of Growth: Consumption Net Export of Goods and Services Gross Capital Formation Final Consumption GDP Growth Rate 160 16.0 140 14.0 120 100 49.8 12.0 10.0 80 35.8 39.5 38.7 40.4 39.6 44.1 43.1 55.5 51.8 8.0 60 6.0 40 20 0 63.2 54.5 1.0 6.0 38.5 22.8 43.6 42.5 16.0 17.9 46.9 9.0 87.6 52.9 4.0 48.8 50.4-4.3-2.2 4.0 2.0 0.0 (20) -37.4-2.0 (40) -4.0 (60) 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012-6.0 Chinese GDP Growth Led by Increasing Consumption Source: CLSA. Allianz Global Investors U.S. LLC 7
China Manufacturing Relative to the US Actual and Projected Manufacturing ULC Relative to the US China Manufacturing Less Appealing Because of Higher Labor Costs Source: CLSA, CEIC, DataStream 8
Emerging Market Middle Class is Rapidly Expanding Middle Class In Emerging Markets Is A Significant Global Trend Estimated Increase in Middle Class by Developing Region, 2000 2030 (Millions) Rapidly Expanding Middle Class, Particularly Within China and Asia Source: World Bank. 9
Expanding Brazilian Middle Class Middle Class In Emerging Markets Is A Significant Global Trend A B C D E Rapidly Expanding Middle Class is Now Primary Consumption Driver in Brazil Source: Data Popular and Itau BBA; In Brazil, socioeconomic levels are divided by letters: A and B (upper income), C (middle income), D (lower middle income), and E (low income). 10
Higher Income with Low Debt Figure 3: Projected Growth in Disposable Income, Figure 4: Consumer Credit as a Percent of GDP, 2010-2015 (% Change) 1 2009-2010 (%) 2 China United States 97 India New Zealand Australia 78 96 Indonesia United Kingdom 71 Taiwan Malaysia 63 Philippines Taiwan Singapore 49 55 Korea Korea 39 Singapore Hong Kong Japan Thailand China 19 17 23 Malaysia Thailand India Indonesia Philippines 6 8 10 0 2 4 6 8 10 12 14 0 20 40 60 80 100 Emerging Consumers Have Increasing Disposable Income and Low Debt Levels 1 Source: Bloomberg News. 2 Source: CLSA 11
Billions (USD) Spending in Asia is increasingly discretionary Consumer Discretionary Spending Growth (2012-2015) Middle Class Discretionary Spending Is Driving Growth Source: CLSA 12
1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 GDP Per Capita Dept Store Apparel & Accessories Sales EM consumer growth potential Emerging market consumers drive future growth in luxury goods Growth in Luxury Goods Apparel & Accessories GDP Per Capita $40 K $35 K $30 K 5% CAGR 9000 8000 7000 $25 K 10% CAGR 6000 $20 K 5000 4000 $15 K 15% CAGR 3000 $10 K 2000 $5 K $0 K India Today $1200 China Today $3300 Brazil Today $7000 Russia Today $9000 1000 0 Historical Growth of Japanese Luxury Market Suggests A Long-Term Story in BRIC Source: Factset; Credit Suisse estimates. Companies are market cap weighted based upon MSCI classifications. 13 13
Impact on Pension Investments
GICS Industry Classifications Consumer Hard Asset Export Mixed Airlines Real Estate Aerospace & Defense Capital Markets Auto Components Real Estate Investment Trusts Air Freight & Logistics Commercial Banks Automobiles Real Estate Management & Development Building Products Diversified Financial Services Beverages Energy Equipment & Services Chemicals Diversified Telecommunication Services Biotechnology Metals & Mining Commercial Services & Supplies Electronic Equipment & Instruments Communications Equipment Oil, Gas & Consumable Fuels Construction & Engineering Insurance Computers & Peripherals Construction Materials Internet Software & Services Consumer Finance Containers & Packaging IT Services Distributors Electric Utilities Semiconductors & Semiconductor Equipment Diversified Consumer Services Electrical Equipment Software Food & Staples Retailing Gas Utilities Thrifts & Mortgage Finance Food Product Ind. Power Producers & Energy Traders Health Care Equipment & Supplies Industrial Conglomerates Health Care Providers & Services Machinery Health Care Technology Marine Hotels, Restaurants & Leisure Multi-Utilities Household Durables Office Electronics Household Products Paper & Forest Products Internet & Catalog Retail Road & Rail Leisure Equipment & Products Semi Equipment & Products (disc 4/30/03) Life Sciences Tools & Services Trading Companies & Distributors Media Transportation Infrastructure Multiline Retail Water Utilities Personal Products Pharmaceuticals Specialty Retail Textiles, Apparel & Luxury Goods Tobacco Wireless Telecommunication Services Source: MSCI, Allianz Global Investors U.S. LLC. Industries have been classified by the Systematic team at Allianz Global Investors U.S. LLC based upon the team s perceived industry affiliation with consumer, hard asset, export and mixed categories. 15
Feb-00 May-00 Aug-00 Nov-00 Feb-01 May-01 Aug-01 Nov-01 Feb-02 May-02 Aug-02 Nov-02 Feb-03 May-03 Aug-03 Nov-03 Feb-04 May-04 Aug-04 Nov-04 Feb-05 May-05 Aug-05 Nov-05 Feb-06 May-06 Aug-06 Nov-06 Feb-07 May-07 Aug-07 Emerging markets: Returns before crisis Performance (%) Consumer-Related Hard Asset-Related Export-Related 800 700 709.3 600 500 400 300 200 100 211.2 148.5 0-100 EM Consumer Underperformed Before the Crisis Source: MSCI, Allianz Global Investors U.S. LLC. Performance is shown from February 1, 2000 to October 30, 2007. Past performance is not indicative of future results. See the GICS Industry Classifications slide for an explanation of export, consumer, and hard asset-related industries. 16
Nov-07 Feb-08 May-08 Aug-08 Nov-08 Feb-09 Emerging markets: Returns during crisis Performance (%) 20 Consumer-Related Hard Asset-Related Export-Related 0-20 -40-51.7-60 -62.3-65.0-80 EM Consumer Outperformed During the Crisis Source: MSCI, Allianz Global Investors U.S. LLC. Performance is shown from November 1, 2007 to February 28, 2009. Past performance is not indicative of future results. See the GICS Industry Classifications slide for an explanation of export, consumer, and hard asset-related industries.. 17
Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Emerging markets: Returns after crisis Performance (%) 250 Consumer-Related Hard Asset-Related Export-Related 200 195.5 150 137.0 100 69.2 50 0 EM Consumer Outperformed After the Crisis Source: MSCI, Allianz Global Investors U.S. LLC. Performance is shown from March 1, 2009 to June 30, 2013. Past performance is not indicative of future results. See the GICS Industry Classifications slide for an explanation of export, consumer, and hard asset-related industries. 18
Commercial Banks Oil Gas & Consumable Fuels Semi & Semi Equip Wireless Telecom Metals & Mining Insurance Automobiles Food & Staples Retailing Food Products Chemicals Beverages Real Estate Mgmt & Dev Diversified Financial Services Electronic Equip & Components Industrial Conglomerates Diversified Telecom Construction Materials Electric Utilities Media Internet Software & Services IT Services Computers & Peripherals Construction & Engineering Multiline Retail MSCI Emerging Markets Index Top 25 Industries MSCI EM Index As of June 30, 2013 20 18 16 14 2.8 16.0 Examples: Itau Unibanco Holding, Banco Bradesco & HDFC Bank Non-Consumer Related: 66% of benchmark Consumer Related: 34% of benchmark 12 10 11.1 Example: Samsung Electronics 8 6 4 2 0 3.7 Example: China Life 4.7 4.9 6.1 0.6 2.5 2.8 2.6 2.6 2.6 2.2 Examples: LG Uplus & Chunghwa Telecom 0.4 2.2 2.0 2.0 1.9 1.4 1.6 1.5 1.5 1.4 1.4 1.2 1.0 0.9 Standard Allocation to the MSCI EM Index Does Not Capture Local Consumer Demand Source: MSCI. MSCI has not approved, reviewed or produced this report, makes no express or implied warranties or representations and is not liable whatsoever for any data in the report. You may not redistribute the MSCI data or use it as a basis for other indices or investment products. Securities reclassified as consumer-related are intended as examples only and not a comprehensive list, and may be subject to reclassification at any time. No single recommendation or subset of recommendations is representative of the composition or performance of the portfolio. Investors should not assume that this example represents an investment that was or will be included in client portfolios, or that such an investment would be profitable; the investment process will not generate similar results in every case. See additional disclosure at the end of this presentation. 19
Emerging Markets Consumer vs. Emerging Markets Small Cap Attribute Emerging Markets Consumer Emerging Markets Small Cap Index Company Type Emphasis on current consumption success (eg. Samsung*) with future consumer growth stories (eg. Daesang*) Primary emphasis on future consumer growth stories Industry Focused on consumer-related industries only Significant exposure to Industrials, Materials and Energy Capitalization All Cap Small capitalization Geographic Takes advantage through global companies Domiciled names only Volatility Returns Lower absolute volatility, better downside protection Since 2007, an Emerging Markets Consumer allocation has demonstrated better return potential than MSCI Emerging Markets Index Higher volatility Since 2007, the MSCI Emerging Markets Small Cap Index has similar returns to the MSCI Emerging Markets Index, so one needs to rely on manager s outperformance EM Consumer Strategies Have Demonstrated Lower Volatility and Better Downside Protection Than EM Small Caps Source: MSCI, Allianz Global Investors U.S. LLC. The MSCI Emerging Markets Small Cap Index includes small cap representation across 23 Emerging Markets countries. With 1,797 constituents, the index covers approximately 14% of the free float-adjusted market capitalization in each country. The small cap segment tends to capture more local economic and sector characteristics relative to larger Emerging Markets capitalization segments. No single recommendation or subset of recommendations is representative of the composition or performance of the portfolio. Investors should not assume that this example represents an investment that was or will be included in client portfolios, or that such an investment would be profitable; the investment process will not generate similar results in every case. See additional disclosure at the end of this presentation. 20
U.S. Investor s 3-Year Institutional Asset Allocation Expectations U.S. Institutional Investors Expect to Increase Emerging Markets Allocation Source: Greenwich Associates 21
U.S. Public Fund s 3-Year Institutional Asset Allocation Expectations The Same Emerging Market Exposure Trend is Also True for Public Funds Source: Greenwich Associates 22
Recap: Emerging Markets Consumer Emerging markets consumers will be a key driver of global growth over the coming decades, shifting from a low cost production center to a self-sustained source of consumer demand An allocation to the Emerging Markets Consumer strategy can help capture the future growth engine of these economies: Direct exposure to consumer-related stocks, while avoiding legacy hard-asset and export-related stocks Builds on the strong economic growth, a large young population, and expanding middle-class The consumer theme spans market capitalization and country of domicile, offering a pure-play approach to capture this long-term secular growth See additional disclosure at the end of this presentation. 23
Additional Disclosure As of June 30, 2013 All materials are presented for Institutional Client use only and are not intended for distribution to the public. The strategy may not achieve its desired results. Past performance is not indicative of future results. All returns are gross unless otherwise noted. Gross returns do not give effect to investment advisory fees, which would reduce such returns. Investment advisory fees are described further in Form ADV Part 2A Brochure of the investment adviser named in the performance presentation of the relevant strategy (the Adviser ). Advisory fees deducted periodically from accounts can have an impact on performance. As an example, the effect of investment advisory fees on the total value of a portfolio assuming (a) $1,000,000 investment, (b) portfolio return of 5% per year, and (c) 1.00% annual investment advisory fee would be $10,268.81 in the first year, $56,741.68 over five years, and $129,160.05 over ten years. 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Although Allianz Global Investors U.S. LLC is registered with the CFTC as a commodity pool operator ( CPO ) and commodity trading adviser ( CTA ), it operates client accounts in this strategy, including funds (if any) as if it were exempt from registration as a CPO or CTA. Disclosure/2 24