EMERGING MARKETS: NEW ECONOMY OPPORTUNITIES Alistair J. MacDonald, CFA Vice President Institutional Portfolio Manager Templeton Emerging Markets Group CFA and Chartered Financial Analyst are trademarks owned by CFA Institute. For Professional Financial Professional Investor Use Use Only. Not / Not for for Distribution to to Retail the Public Investors.
Emerging Markets: Why Now?
Politics......and Populism Source: Boris Johnson: http://snappa.static.pressassociation.io/assets/2015/06/17124034/1434541231-dcf7a33bc96928df154a7685e03afadb-600x800.jpg Donald Trump: http://thehustle.co/donald-trump-technology 2
Technology: Secular Long Term Growth Emerging Markets Most Tech Dominated Index MSCI EM Index Sector Evolution January 2008 March 2018 40 IT Sector Weighting: MSCI Indices March 2018 30 35 30 25 20 15 10 5 IT Sector Weighting (%) 25 20 15 10 5 0 2008 2010 2012 2014 2016 2/28/2018 Energy/Materials Technology Consumer 0 EM US Japan Euope April-18 For illustrative and discussion purposes only. Past performance is not an indicator or a guarantee of future performance. Source: FactSet, MSCI, as of March 2018. MSCI makes no warranties and shall have no liability with respect to any MSCI data reproduced herein. No further redistribution or use is permitted. This report is not prepared or endorsed by MSCI. See www.franklintempletondatasources.com for additional data provider information. 3
Technology: Semiconductors Profitability Supported by Market Consolidation DRAM Market Share by Company 2005 2016 100% 90% DRAM Market Share (%) 80% 70% 60% 50% 40% 30% 20% 10% 16% 17% 23% 21% 26% 25% 24% 27% 23% 32% 29% 31% 23% 22% 37% 39% 41% 42% 31% 31% 30% 47% 49% 52% Others Qimonda Elpida Micron Hynix Samsung 0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 For illustrative and discussion purposes only. Past performance is not an indicator or a guarantee of future performance. Source: Gartner, IC insight, J.P. Morgan estimate, as of December 2016. See www.franklintempletondatasources.com for additional data provider information. 4
Technology: ecommerce Dominance Singles Day Biggest Retail Event Globally Alibaba Singles Day Sales 2017 $25.3bn Thanksgiving, Black Friday, & Cyber Monday Online Sales 2017 $19.6bn All Retailers in U.S. For illustrative and discussion purposes only. Source: Bloomberg; Techcrunch, adobe analytics Black Friday online sales US$5.03B, Cyber Monday; US$6.59bn and Thanksgiving US$2.87bn Total was for the period from 23-27 November 2017. Total sales in 2017 reached US$25 billion for Alibaba. 5
Technology: How Small Caps Succeed Compete or Complement? Baozun: Chinese ecommerce Service Provider 50 40 USD 30 20 10 0 Company IPO at $110mn; priced below indicative range. 10% Alibaba stake. 2015 challenging year for broader market and company profitability 2016: Strategic shift in company s service model; increasing recognition of value-add from foreign brands. Rising GMV and profitability 2015 2016 2017 Initiated exposure on growth expectations, shift in business model, greater client integration; client channel checks strong For illustrative and discussion purposes only. Past performance is not an indicator or a guarantee of future performance. As of March 2018. This is an example of an investment made by the 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 or investments made by the advisor. 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. 6
Technology: EVs and Healthcare Emerging Market Leadership New Electric Vehicle Registrations 2010 2016 US FDA Approved Manufacturing Plants July 31, 2017 350 300 250 200 150 100 50 0 2010 2011 2012 2013 2014 2015 2016 1000 750 500 250 0 US China For illustrative and discussion purposes only. Past performance is not an indicator or a guarantee of future performance. Source: International Energy Agency, BAAM, InsideEVs, ACEA; June 30, 2017. US FDA as of July 31, 2017. 7
Technology: Electric Vehicles China Outpacing U.S. in 2017 Sales Tesla: 103,181 BYD: 108,612 For illustrative and discussion purposes only. Past performance is not an indicator or a guarantee of future performance. Source: Tesla Motors, BYD annual reports. 8
Consumer: Premiumisation Brilliance China: Then : Source: CarNewsChina.com, ChinaCarForums.com. 9
Consumer: Premiumisation Brilliance China: And now: Source: BMWBlog.com 10
Consumer: Premiumisation Brands Support Earnings Sustainability Brilliance: BMW s Joint Venture in China 25 HKD 20 15 10 5 0 Exposure initiated by previous PM on long term positive earnings outlook Anti-corruption campaign and auto market weakness impact sentiment; short term marketing costs impact earnings. Shareholdings increased four-fold. Earnings growth accelerates in 2017 on successful introduction of new models; JV with Renault. 2014 2015 2016 2017 2018 For illustrative and discussion purposes only. Past performance is not an indicator or a guarantee of future performance. As of March 2018. This is an example of an investment made by the 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 or investments made by the advisor. 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. 11
Healthcare: Diversified Opportunities Idiosyncratic Returns Medy Tox: Korean Botox Producer 800000 Trimmed exposure during 2015. Dec- 2015: Re-rated to 63x forward PE, with market cap of $2.3bn. KRW 700000 600000 500000 400000 300000 200000 100000 Off benchmark, underresearched, under-owned and undervalued company trading at 13x PE with market cap of $106m at purchase. 90 day ADV of $1.5m. Only 5 local research firms cover stock. Stock added to MSCI EM Small Cap Index in June 2012, trading at 19x forward PE with 90 day ADV of $5m. Added exposure on weakness during 2016. Dec-2017: Stock now covered by 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 For illustrative and discussion purposes only. Past performance is not an indicator or a guarantee of future performance. As of March 2018. This is an example of an investment made by the 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 or investments made by the advisor. 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. 12
Emerging Markets: Under-owned EM Equities Massively Under-represented in Investor Portfolios Emerging Markets as a % of: December 2017 Global GDP Growth* 60% Patent Applications* 50% Global GDP* 42% Global Market Cap 33% MSCI AC World 13% Global Fund Allocations 9% For illustrative and discussion purposes only. Past performance is not an indicator or a guarantee of future results. Source: World Bank, FactSet, MSCI, EPFR, Citi Research. As of December 2017. *As of December 2017. 13
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