January Overview

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

Overview

Optimism continued in the early part of January with emerging markets reaching a 17-month high on January 11. Market sentiment was, however, dampened by concerns about the strength of the global recovery, China's tightening policies to curb overheating in certain sectors, Greece's high debt levels and a proposal from U.S. President Barack Obama to spilt major investment banks, affecting profitability. Despite recording a 4% increase in the earlier part of the month, the MSCI Emerging Markets ended the month down 6% in US$ terms.

Eastern European markets were the top performers in January with the Czech Republic, Hungary and Russia ending the month with positive returns. Greater investor confidence as a result of the country's improving economic fundamentals and the recent credit rating upgrade led the Turkish market to outperform its emerging market counterparts with a 2% return in US$ terms. In Asia, regional markets corrected as investors grew increasingly concerned about the Chinese government's efforts to curb inflationary pressures and rapid economic growth. We believe the actions taken from the government will not derail the country's broader economic recovery. In Latin America, Brazil underperformed its peers with an 11% decline in US$ terms due to a weaker Real. Chile and Colombia, however, ended January with positive returns.

Regional Update

Asia

GDP growth in China accelerated to 8.7% y-o-y in 2009, exceeding the government's 8% target. GDP grew 10.7% y-o-y in the final three months of the year, compared to 9.1% y-o-y in the third quarter. China's expansionary credit policy as well as greater public expenditure and consumer demand drove growth. Exports recorded positive growth in December, the first time in more than a year, due to an improved global economic outlook. Exports grew 17.7% y-o-y, compared to a decline of 1.2% y-o-y in November. Economic recovery and improving domestic demand led consumer prices to increase 1.9% y-o-y in December, its second consecutive monthly increase after nine months of declines. In January, the People's Bank of China (PBOC) switched to a tightening monetary policy as part of efforts to curb excessive credit growth. The PBOC raised the reserve ratios for banks by 50 basis points (0.5%) to 16% for the country's largest banks and 14% for the smaller banks. Yields on government bonds were also raised.

South Korea's economic growth slowed down in the fourth quarter of 2009 due to declines in exports, and government and consumer spending during the period. GDP edged up 0.2% q-o-q compared to a growth of 3.2% q-o-q in the third quarter. Exports decreased 1.8% q-o-q in the last three months of 2009, compared to a growth of 5.2% in the preceding quarter. Government expenditure decreased 2.9% q-o-q, while private consumption edged down 0.1% q-o-q, reversing a 1.5% growth in the third quarter. For the year, GDP grew 0.2% y-o-y. The Central Bank forecasts 2010 GDP to grow 4.6% y-o-y. The Central Bank maintained its key interest rate at the record-low level of 2% for the eleventh consecutive month in January to continue supporting the domestic economy.

The Indian government raised its GDP growth forecast for the fiscal year 2009/10 (April to March) to 7.8% in January. Government stimulus measures, low interest rates and greater domestic demand is expected to further support growth in industrial production, investment and exports. GDP grew 7.0% y-o-y in the first half of the fiscal year. Industrial output growth reached a two-year high of 11.7% y-o-y in November, following a 10.3% y-o-y increase in October. The Reserve Bank of India announced a 75 basis points (0.75%) increase in the cash reserve ratio to 5.75% in January in an effort to reduce excessive liquidity in the system, help maintain price stability and curb rising inflationary pressures. The increase will be implemented in two stages in February. The Bank, however, left its benchmark interest rates unchanged. Wholesale inflation prices rose 7.3% y-o-y in December, higher than the 4.8% y-o-y increase recorded in November and the fastest in more than a year.

Latin America

Private consumption in Brazil continued to strengthen in the latter part of 2009. Retail sales rose 8.7% y-o-y in November, following an 8.6% increase in October and a significant improvement from the 2.9% y-o-y gain in May 2009. Inflationary pressures remained stable with consumer prices rising 4.3% y-o-y in December 2009, in line with November's 4.2% y-o-y increase and within the Central Bank's target range. Brazil remained one of the most attractive foreign investment destinations in the emerging market asset class in 2009. FDI inflows, as a result of mergers and acquisitions, totaled US$9.7 billion in 2009 and accounted for about 60% of the total into Latin America.

Africa

The South African government revealed improving healthcare, job creation and tackling crime as its priorities for the next five years. Inflation exceeded the Central Bank's 3% to 6% target range for the first time in three months in December. Consumer prices rose 6.3% y-o-y, higher than the 5.8% y-o-y increase in November. The higher inflation was the result of a low base of comparison in December 2008. The manufacturing sector continued to improve with output recording its third consecutive monthly increase in November. On a y-o-y basis, output was still down 4.7%. This was the smallest decline so far this year and less than half the 9.6% y-o-y fall in October. Retail sales, however, deteriorated in November with a 6.6% y-o-y decline. This compared to a contraction of 6.1% y-o-y in October.

Europe

Russia's industrial sector continued to strengthen with production rising for the fourth consecutive month in December on an m-o-m basis. Output increased 5.0% m-o-m and 2.7% y-o-y in December. Manufacturing output recorded its first annual growth in more than a year with a 0.7% increase in December. Inflationary pressures continued to ease in Russia with consumer prices increasing 8.8% y-o-y in 2009, lower than the 13.3% y-o-y in 2008 and the lowest since 1992. This allowed the Central Bank to maintain an expansionary monetary policy. The Bank implemented cut the key benchmark interest rate by 25 basis points (0.25%) to 8.75% at the end of December 2009.

In Turkey, unemployment eased to 13.0% in the September to November period from 13.4% in the preceding three-month period. Progress in the government's privatization program continued in 2009. Deals worth US$2.3 billion were signed during the year. The government budget deficit increased to US$34.8 billion in 2009 from US$11.6 billion in 2008 but still remained lower than the forecast in the Medium Term Economic Program. Finance Minister Mehmet Simsek also noted that monthly numbers towards the end of the year were better than expected.

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: 24 February 2010