Goldilocks & the Three Bears, an Emerging Markets Tale October 2011 The CFA Society of Pittsburgh Presented by: Brett Gallagher, Deputy Chief Investment Officer Artio Global Management LLC
Emerging Markets Have Not Fared Well Over the Past Year 0.50 Relative Performance Emerging vs Developed Markets (MSCI EM Free Index vs MSCI World Index) 0.49 0.48 0.47 0.46 0.45 0.44 0.43 0.42 0.41 040 0.40 10/6/2010 10/20/2010 11/3/2010 11/17/2010 12/1/2010 12/15/2010 12/29/2010 1/12/2011 1/26/2011 2/9/2011 2/23/2011 3/9/2011 3/23/2011 4/6/2011 4/20/2011 5/4/2011 5/18/2011 6/1/2011 6/15/2011 6/29/2011 7/13/2011 7/27/2011 8/10/2011 8/24/2011 9/7/2011 9/21/2011 10/5/2011 Source: MSCI Barra Artio Global Management LLC 2
Either the Porridge Was Too Hot or Too Cold 15% 10% Emerging vs Developed Market Performance Developed EMG 5% 0% -5% -10% -15% -20% -25% -30% Fear of inflation Fear of Hard Landing 10/6/10-2/10/11 8/2/11-10/5/11 EM vs DM Source: MSCI Barra Artio Global Management LLC 3
Too Hot Fears Are Fading Chinese Consumer Price Inflation Moderating 10 Headline inflation (from CEIC, % y/y) y) 8 Inflation excluding pork only (CE estimate, % y/y) 6 4 2 0-2 -4 01/2005 03/2005 05/2005 07/2005 09/2005 11/2005 01/2006 03/2006 05/2006 07/2006 09/2006 11/2006 01/2007 03/2007 05/2007 07/2007 09/2007 11/2007 01/2008 03/2008 05/2008 07/2008 09/2008 11/2008 01/2009 03/2009 05/2009 07/2009 09/2009 11/2009 01/2010 03/2010 05/2010 07/2010 09/2010 11/2010 01/2011 03/2011 05/2011 07/2011 Source: Capital Economics Artio Global Management LLC 4
Valuations Make for an Interesting Entry Point Price to Earnings Price to Book 60.0 50.0 40.0 30.0 MSCI CHINA MSCI INDIA 7.0 MSCI CHINA MSCI INDIA 6.0 5.0 4.0 20.0 10.0 15.0 8.6 3.0 2.0 1.0 2.5 1.5-1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011-1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: MSCI Barra Artio Global Management LLC 5
Investors May Be Losing Track of the Big Picture Household Liabilities (as % of GDP - 2008) 160% 140% 120% 100% 80% 60% 40% 20% 0% Denmark Netherlands Ireland Unit ted Kingdom Portugal United States Spain Norway Sweden France Estonia Germany Finland Greece Austria Italy Belgium Latvia Hungary Slovakia Bulgaria Lithuania Poland Slovenia Romania China Developed Markets Emerging Markets Source: Societe Generale, Citi Investment Research & Analysis, Artio Global Management LLC Artio Global Management LLC 6
Investors May Be Losing Track of the Big Picture Government Debt/GDP Estimates in Year 2015 250 200 150 100 50 0 Japan Greece Italy US Belgium Ireland Portugal France UK Hungary Spain Netherlands Austria Iceland Germany Canada India Finland Brazil Poland Malaysia Norway Argentina Denmark Pakistan Mexico Turkey Philippines South Africa Ukraine New Zealand Sweden Bulgaria Korea Sau Indonesia Australia Russia China Nigeria di Arabia Chile Developed Markets Emerging Markets Source: International Monetary Fund Artio Global Management LLC 7
Emerging Markets Have Grown In Importance Over the Past Decade Historical Weighting of Emerging Markets (as a % of MSCI ACWI) 16 14 12 10 8 6 Weighting 4 2 0 3/31/1995 9/29/1995 3/29/1996 9/30/1996 3/31/1997 9/30/1997 3/31/1998 9/30/1998 3/31/1999 9/30/1999 3/31/2000 9/29/2000 3/30/2001 9/28/2001 3/29/2002 9/30/2002 3/31/2003 9/30/2003 3/31/2004 9/30/2004 3/31/2005 9/30/2005 3/31/2006 9/29/2006 3/30/2007 9/28/2007 3/31/2008 9/30/2008 3/31/2009 9/30/2009 3/31/2010 9/30/2010 12/31/2010 Source: Factset Artio Global Management LLC 8
But Are Still Underrepresented Relative to Their Real World Importance Emerging Economies (as a % of World Total) Population 85.40 Foreign Exchange Reserves¹ 67.40 Energy Consumption 57.22 GDP at PPP 46.20 Exports 34.50 GDP, Current Prices 31.05 Stockmarket Capitalization 13.88 0 10 20 30 40 50 60 70 80 90 Sources: Human Development Index, Bloomberg, IMF, BP,MSCI, Artio Global Management LLC 1. International reserve assets excluding holdings of gold. Artio Global Management LLC 9
And Vastly Understated in Terms of Their Future Import 55% Emerging Markets GDP % Global Total 50% 45% 40% 35% 30% 25% 20% 15% 10% 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e Source: IMF, Artio Global Calculations Artio Global Management LLC 10
Asia (China & India) Will Remain the Major Drivers 25% China and India GDP % Global Total 20% 15% 10% 5% 0% 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e Source: World Bank Artio Global Management LLC 11
The Big Picture Is the Secular Trend Rapid Growth in Middle Class Consumers Consumers earning over US$6K annually (in real 2008 US$ terms) 6,000 5,000 Rest of World Millio ons of People 4,000 3,000 2,000 India Mexico China 1,000 0 1960 1970 1980 1990 2000 2010 2020 2030 Brazil Russia US W. Europe Japan Source: UN Population Division, Goldman Sachs Global ECS Research Artio Global Management LLC 12
The Big Picture Is the Secular Trend 546 Estimated Change Number Middle Income Consumers (>$6k/yr) 2010-2020 310 67 43 34 27 24 21 19 19 16 15 8 4 0 Chin na Ind dia Indones sia Bra azil Egy ypt Vietna am Mexic co Ira an Philippin es Pakista an Turk ey Niger ria Russ sia Banglades sh South Kor ea Source: UN Population Division, Goldman Sachs Global ECS Research Artio Global Management LLC 13
The Big Picture Is the Secular Trend Est. Change Number "Super" Middle Income Consumers (> $30k/yr) 2010-2025 612 310 187 61 40 25 25 10 China USA Russia Brazil Source: UN Population Division, Goldman Sachs Global ECS Research Japan India Re est of World Total Artio Global Management LLC 14
Driven By Continued Urbanization Current Level of Urbanization (% of Population) 87% 82% 85% 80% 81% 73% 74% 67% 68% 47% 30% China India Brazil Russia USA Japan Germany France UK Italy Canada Source: UN World Population Prospects, the 2010 Revision Artio Global Management LLC 15
Continued Urbanization Est. Annual Increase in Urban Population (millions) 39.4 37.2 22.8 13.5 0.8 0.1 0.9 0.4 0.2 0.4 0.1 0.2 0.1 2.2 China India Brazil Russia USA Japan Germany France UK Italy Canada TOTAL BRIC G-7 Source: : UN World Population Prospects, the 2010 Revision, Artio Global Management Artio Global Management LLC 16
Greater Wealth Changes Consumption Patterns Proportion of Fresh vs. Packaged Food Consumption 100% 90% 80% % Packaged % Fresh 70% 60% 50% 40% 30% 20% 10% 0% China India Vietnam Philippines Indonesia South Korea World Egypt Brazil Turkey Russia Japan Canada Mexico Italy US Germany UK France Source: Euromonitor Artio Global Management LLC 17
In Absolute, Not Just Growth Terms, Emerging Markets Are Entering a New Phase World Car Registrations (Annual rate, 6 months moving average) 20,000,000, 18,000,000 16,000,000 14,000,000 US EU 25 12,000,000 10,000,000 8,000,000 China 6,000,000 4,000,000 Japan 2,000,000 0 Brazil India Korea 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: SG Cross Asset Research Artio Global Management LLC 18
With Plenty of Room for Growth Cars per 1000 People 808 576 257 159 14 28 India China Brazil Korea Japan US¹ Source: World Bank WDI, Haver Analytics, CEIC (2008) 1. US cars in use include passenger cars and light vehicles/suvs Artio Global Management LLC 19
Greater Growth Changes Consumption Patterns 600 Packaged Food and Hot Drinks Market Size 500 2009 2025E US$ Billions 400 300 200 100 0 Bangladesh Nigeria Pakistan Vietnam Philippines Egypt South Korea Indonesia Iran Canada India Source: Euromonitor, Goldman Sachs Research estimates Turkey Italy Germany France UK Mexico Russia Brazil Japan US China Artio Global Management LLC 20
Greater Growth Changes Consumption Patterns 40 Home Care Market Size 30 2009 2025E US$ Billio ons 20 10 0 Bangladesh Nigeria Vietnam South Korea Pakistan Egypt t Indonesia Canada Philippines Iran Turkey Germany Italy France UK Mexico Russia Japan India Brazil US China Source: Euromonitor, Goldman Sachs Research estimates Artio Global Management LLC 21
Greater Wealth Changes Consumption Patterns Share of Household by Product Category (% - averages by wealth level) 100% Restaurants and hotels % of Househ hold Spending by Category 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 800 to1,000 1,000 to1,500 1,500 to 2,000 2,000 to 3,500 3,500 to 7,000 7,000 to 20,000 20,000 to 35,000 >35,000 Education Recreation and Culture Communication Transport Health Furnishings, household equipment and maintenance Housing, water, electricity and other fuels Clothing and f ootwear Alcoholic beverages and tobacco Food and non-alcoholic beverages Country Average by Wealth Band (GDP/Capital) Source: Goldman Sachs Global ECS Research; July 12, 2010 Artio Global Management LLC 22
India Stands Out in Terms of Demographics Population Age 15-64 of Total Popula ation % 80 75 70 65 60 World China India 55 50 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 Source: United Nations Population Statistics Artio Global Management LLC 23
... And for Its Potential to Play Catch Up India: The Next Wave for Commodity Demand? (GDP/Capita real 2005 $PPP terms) Real 2005 $PPP Terms 7 6 5 4 3 China India China India GDP/Capita 2 1 0 1990 1995 2000 2005 2010E 2015E 2020E 2025E Source: Global Insight Artio Global Management LLC 24
India Even Lags the Other BRICs Energy Consumption (oil per capita) Color TV (per 100 households) Mobile Telephone Subscriptions (per 100 population) Computers (per 100 population) Rail Freight ( 000 tons per km per year) China 1,484 96.1 48.0 5.7 2,523,917 India 529 31.7 29.4 3.3 551,448 Brazil 1,239 95.6 78.5 14.1 267,700 Russia 4,730 96.1 141.1 13.3 1,865,305 Source: The Economist World in Figures, 2011 Edition Artio Global Management LLC 25
Infrastructure Will Be the Key Driver in the Indian Story Indian Infrastructure Spending (as a % of GDP) 2.5 5% 2.0 4% Rupe ees (trillions) 1.5 1.0 3% 2% 0.5 1% 0 0% FY98 FY00 FY02 FY04 FY06 FY08 Source: UBS Estimates Artio Global Management LLC 26
Appendix Artio Global Management LLC #0200 27
Worry (and the Opportunity) in China Is Balance 50% Chinese GDP Composition (as % Total GDP) Gross Fixed Capital Consumption 45% 40% 35% 30% 25% Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Source: Bloomberg Artio Global Management LLC 28
Manufacturing Investment Is the Component to Monitor Distribution of Fixed Asset Investment as % GDP (12 mma) 0.45 Manufacturing Real Estate Infrastructure 0.4 035 0.35 0.3 0.25 02 0.2 Feb-03 Apr-03 Jun-03 Aug-03 Oct-03 Dec-03 Feb-04 Apr-04 Jun-04 Aug-04 Oct-04 Dec-04 Feb-05 Apr-05 Jun-05 Aug-05 Oct-05 Dec-05 Feb-06 Apr-06 Jun-06 Aug-06 Oct-06 Dec-06 Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Source: Bloomberg, China Economic Information Network, Artio Global Management Artio Global Management LLC 29
Worry Far Less Leverage in the Economy 92.9 Mortgages (as a % of GDP) 72.2 44.9 29.7 26.9 22 21.5 7.9 10.7 9.1 6 2.5 India US UK Hong Kong Taiwa n China Korea Japa n Singapore Thailand Malaysia a Indonesia 1. Source: RBI, CEIC, ERWIN, Central Banks (2008) Artio Global Management LLC 30
Structural Clarity: Growth Shifting In Land 65% China Fixed Asset Investment Coastal Region (% of total) 60% 55% 50% 45% 40% 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Credit Suisse Artio Global Management LLC 31
Structural Clarity: Growth Shifting In Land 56% China Coastal GDP (% of total) 54% 52% 50% 48% 46% 44% 42% 40% 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Credit Suisse Artio Global Management LLC 32
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