Outlook 2010

Mark Mobius, Ph.D.
Executive Chairman, Templeton Asset Management Ltd.

During 2009, emerging markets experienced a tremendous surge after a significant fall at the end of 2008. The result of that surge was that during 2009 the MSCI Emerging Markets index returned 79% in US$ terms. Some markets even doubled during the year. The surge in prices was a result of many factors but most significantly the rapid increase in money supply and liquidity supplied by governments globally to prevent an economic depression. This led to a huge influx of funds in the emerging markets asset class. In the first 11 months of 2009, emerging markets recorded nearly US$75 billion in net inflows, about 40% more than the record-high US$54 billion in 2007. In the last 15 years, net inflows have totaled more than US$153 billion. This trend is expected to continue.

Another critical aspect of the year was the way the two most populous countries in the world, China and India, forged ahead with incredible GDP growth of 8% and 6%, respectively, in the first nine months of 2009 in the face of dire predictions regarding the global economy.

Of course, that is not to say that there haven't been any anxieties in 2009 but they have been far and few. A recent, but temporary, setback was the announcement by the Dubai government-owned Dubai World of a six-month debt payment standstill. Markets, however, rebounded quite quickly after neighboring Abu Dhabi provided funds to Dubai to help repay debts. In general, as long as global money supply continues its upward trend, we believe that the bullish sentiment in emerging markets can be sustained.

In fact, we could see more and more money being directed into emerging markets in the next 10 years as investors realize that they can buy good value at reasonable prices with relatively lower risk as compared to developed markets. The rapid developments in emerging markets should allow these markets to command even greater attention in the global investment universe. In fact, emerging markets such as China, Brazil, Russia and India could become some of the world's most important and influential countries.

Our outlook for emerging markets in 2010 is optimistic. We believe that emerging markets are in a secular bull trend and the general direction of emerging market countries is positive. Many countries have already returned to growth and we expect that growth to only strengthen in 2010. We have seen governments globally implement huge stimulus packages to bring economies out of recession and ensure that they maintain sustainable growth. Thus, we remain optimistic about the markets' upside potential.

However, it is important to realize that volatility is still with us and will be with us for a while. This means that there will be down markets as well as up markets. Risks such as the inability of governments to control the derivatives markets, loss of confidence, over or poor regulation, adoption of protectionist measures, and abandonment of the market economy philosophy do also exist. Therefore, we must pay attention to valuations and long-term earnings growth prospects in order to avoid buying or holding expensive stocks as a result of dramatic price rises that we have seen. Current valuations are below the five-year high valuations and as a result, are not excessive.

Since it's usually possible to find at least a few bargains in most markets, all emerging market regions are looking exciting. BRIC countries are among the fastest growing economies in the world and we believe that they will continue to be a key global economic growth driver. One of the key supporting factors for investing in Asia is its robust economic growth. Asian economies have not only been growing faster than developed countries in North America, Western Europe, Japan, Australia and New Zealand but also their emerging markets counterparts. Another key investment theme in Asia is increasing consumption. The growth perspectives for Latin America also continue to be good. Strong commodity prices associated with a solid domestic demand for goods and services are the key drivers of economic recovery in the region.

In Eastern Europe, valuations remain very attractive. Markets such as Russia and Turkey are trading at single-digit price-to-earnings ratios. In addition to the traditional emerging markets in Asia, Latin America and Eastern Europe, the progression of a "younger generation of emerging markets" - the frontier markets should also prove to be very exciting as these markets come to the forefront. In terms of sectors, Commodity stocks look good because we expect the global demand for commodities to continue its long-term growth. Consumer stocks are also favored. With rising per capita income and strong demand for consumer goods, the earnings growth outlook for these stocks is positive.

Thus, we look to 2010 with optimism keeping in mind that every bull market will have corrections and with the active developments in derivatives, those corrections can be large. Our optimism is founded on: (1) growing investor confidence in equities, generally and emerging markets specifically, (2) strong fund inflows into emerging markets, (3) the search for higher returns in the face of low bank interest rates, (4) relatively higher GDP growth in emerging markets, (5) the accumulation of foreign exchange reserves which puts emerging economies in a much stronger position to weather external shocks, (6) the relatively lower debt levels of emerging market countries, and (7) the high level of money supply growth globally. All these factors make emerging markets attractive to investors over the world.

Please click for more information on the following funds:
FTIF - Templeton Asian Growth Fund
FTIF - Templeton Asian Smaller Companies Fund
FTIF - Templeton BRIC Fund
FTIF - Templeton China Fund
FTIF - Templeton Eastern Europe Fund
FTIF - Templeton Emerging Markets Fund
FTIF - Templeton Emerging Markets Smaller Companies Fund
FTIF - Templeton Frontier Markets Fund
FTIF - Templeton Korea Fund
FTIF - Templeton Latin America Fund
FTIF - Templeton Thailand Fund