December Overview

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

Overview

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.

Regional Update

Asia

China continued to report encouraging economic data during the quarter. GDP growth accelerated in the third quarter of 2009 as the government's stimulus measures and robust bank lending continued to boost economic recovery. GDP grew 9% y-o-y during the third quarter, compared to 8% y-o-y in the second quarter. Exports recorded their smallest decline in more than a year with a contraction of just 1% y-o-y in November. Imports, on the other hand, jumped 27% y-o-y, its first increase since October 2008. Value-added output also continued to record growth with output increasing 19% y-o-y in November, higher than the 16% y-o-y in October and 11% y-o-y growth in June 2009. The increase has been mainly driven by infrastructure investment resulting from the government's stimulus measures. U.S. President Barack Obama visited China in November where he met Premier Wen Jiabao and President Hu Jintao. Both countries agreed to continue dialogue and work together on a wide range of issues including economic recovery, anti-terrorism and climate change. Russian Prime Minister Vladimir Putin visited China where he met President Hu Jintao to discuss plans to improve co-operation, especially in areas such as energy, technology and culture. As a result, Russia and China signed deals worth US$3.5 billion. Moreover, China and Japan vowed to increase trust and cooperation to form a stronger bilateral strategic relationship.

Exceeding market expectations, the South Korean economy grew 3% q-o-q in the third quarter of 2009. This was the fastest in more than seven years. Growth in the manufacturing and capital sectors coupled with stimulus spending and record low interest rates supported the domestic economy. South Korea's trade sector also reported positive data with exports returning to growth after more than a year. Exports rose 18% y-o-y to US$34.1 billion in November, resulting in a trade surplus of US$4.6 billion. The signing of a free trade agreement with the European Union in early 2010 could further support export growth. During the quarter, U.S. President Barack Obama visited South Korea where he met with President Lee Myung-bak. Both leaders vowed to further develop bilateral relations, work towards the denuclearization of North Korea through six-party talks and accelerate efforts to rectify the Korea-U.S. free trade agreement. Aimed at improving bilateral relations, Minister of Foreign Affairs and Trade, Yu Myung-hwan visited Vietnam in October. Both sides agreed to increase dialogue to develop mutual understanding and further expand political, economic and cultural relations.

The Indian economy grew 8% y-o-y in the third quarter of 2009, the fastest in 18 months. Key drivers of growth included government expenditure, private consumption and the manufacturing sector. In comparison, GDP grew 6% y-o-y in the preceding three-month period. Growth in the industrial sector remained robust with production increasing 10% y-o-y in October. This was a significant improvement from the 1% y-o-y in April 2009. Manufacturing output also recorded double-digit growth with an 11% y-o-y increase in November. The trade sector showed signs of bottoming as the decline in exports and imports continued to moderate. Exports contracted 7% y-o-y in October, about half the 14% y-o-y decline recorded in September and its smallest contraction in ten months. Imports declined 15% y-o-y to US$22.0 billion, less than half the 31% y-o-y fall recorded in September. This led the trade deficit to narrow to US$8.8 billion in October from US$11.7 billion, a year earlier. Prime Minister Manmohan Singh visited the U.S. in November where he held talks with President Barack Obama. Both leaders agreed to expand cooperation in a number of areas such as the economy, technology, agriculture and trade. Politically, The National Congress party won all three state elections in October. The results confirmed the popularity enjoyed by the Congress-led United Progressive Alliance (UPA) government as a result of the country's recent economic recovery and government stimulus measures.

Latin America

Brazil's GDP grew 1% q-o-q in the third quarter of 2009, slightly faster than the growth recorded in the preceding quarter. In addition to the manufacturing and services sectors, growing demand for fixed capital and higher private consumption also supported growth during the quarter. An expansionary monetary policy, tax breaks and lower inflation increased disposable incomes. The industrial sector also continued to improve with output rising 2% m-o-m in October. This marked the tenth consecutive month of growth. However, on a y-o-y basis, industrial production was 3% lower. This, was however, much better than the 15% y-o-y decline in April 2009. In the trade sector, exports recorded their smallest annual contraction in seven months with a 14% y-o-y decline to US$12.7 billion in November. Imports were down 8% y-o-y, much less than the 26% y-o-y fall in October. The trade surplus, however, narrowed to US$615 million, from US$1.3 billion in October. The selection of Rio de Janeiro as the 2016 Summer Olympics host city will make it the first South American city to host the games. Preparation for the games is expected to further boost the country's economy recovery. Significant investment in areas such as infrastructure, construction, transportation as well as tourism and hospitality is expected. The government announced the implementation of a 2% tax on capital inflows into portfolio investment in October. The tax is primarily aimed restraining the strength of the Real which has appreciated dramatically against the US Dollar.

Africa

The South African economy returned to growth in the third quarter of 2009. Annualized GDP rose 1% q-o-q, compared to a decline of 3% y-o-y in the second quarter. Key contributors to growth included the manufacturing, government services and construction sectors. The government intends to implement plans to increase spending in infrastructure and social security despite the global economic crisis as the extra expenditure could support domestic demand and stimulate economic recovery. Higher global demand for commodities, a recovery in domestic demand as well as the preparations and hosting of the 2010 World Cup should further support economic growth in 2010. The manufacturing sector continued to improve with output recording its second consecutive monthly increase. On a y-o-y, basis, however, output was still down 9%. This was the smallest decline so far this year and a significant improvement from the 22% y-o-y contraction in April 2009. A recovery in Chinese demand and the implementation of fiscal stimulus measures supported the sector. Inflationary pressures continued to ease, with consumer prices increasing 6% y-o-y in November. This was in line with the Central Bank's 6% target ceiling.

Europe

Latest data showed that Russia's GDP grew 14% q-o-q in the third quarter of 2009. Y-o-y, however, GDP contracted 9%, which was still an improvement from the 11% y-o-y fall in the second quarter of 2009. Government stimulus measures, favorable external conditions and lower interest rates supported the country's economic recovery. The Central Bank maintained an expansionary monetary policy during the fourth quarter as efforts to stimulate the domestic economy continued. The benchmark interest rate was cut by 100 basis points (1.0%) to 9%. This brought the cumulative reduction in the rate to 4% since April 2009. The first deputy chairman of the Bank said that the interest rate could be cut further in 2010. Inflationary pressures continued to ease with consumer prices increasing 9% y-o-y in November. This compared to an increase of 10% y-o-y in October. Vietnamese Prime Minister Nguyen Tan Dung visited Russia in December where he met with his counterpart, Vladimir Putin. Both countries agreed to increase bilateral cooperation in fields such as energy, politics, trade, defense and technology. In October, Prime Minister Vladimir Putin visited China where he met Chinese President Hu Jintao to discuss plans to improve co-operation between the two countries, especially in areas such as energy, technology and culture. Russia and China signed deals worth US$3.5 billion.

While the Turkish economy contracted in the third quarter of 2009, the rate of decline continued to moderate. Recording its fourth consecutive quarterly decline, GDP contracted 3% y-o-y. This compared to contractions of 8% and 15%, y-o-y in the second and first quarters, respectively. A growth in government spending and easing declines in private consumption, exports and gross fixed capital formation supported the domestic economy. The industrial sector also continued to show signs of improvement with output rising 6% y-o-y in October, its first increase after 14 consecutive months of decline. The Central Bank maintained an expansionary monetary policy during the fourth quarter to support the country's economic recovery. The Bank cut its benchmark borrowing interest rate by 75 basis points (0.75%) to 6.5%. Inflation continued to ease with consumer prices remaining well below the Bank's year-end target. International ratings agency, Fitch raised its rating on the country's long-term sovereign foreign debt by two levels to BB+ from BB- in December as a result of its relative resilience to the global financial crisis. Turkish President Abdullah Gul visited Jordan in December where both countries signed a free trade agreement to further strengthen economic relations and boost bilateral trade. The two leaders also discussed regional infrastructure projects. Working towards eventual accession into the European Union (EU), Turkey opened talks on the environment chapter in December.

Outlook

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.

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

Posted: 11 January 2010