Monthly Commentary as of end April 2010

By Dr. Mark Mobius,
Executive Chairman,
Templeton Asset Management Ltd.

OVERVIEW

Emerging markets continued to record positive returns in the first half of April on the back of strong economic recovery stories in Asia. However, some of the gains were lost as concerns about Greece's precarious financial problems and the possibility of contagion to Spain, Portugal and other countries in Europe began to worry investors. The MSCI Emerging Markets index returned 1.2% in US$ terms. Higher commodity prices supported equity prices.

Asia was the top performing region, with Indonesia, Singapore, South Korea and the Philippines outperforming, in part due to stronger Asian currencies. Conversely, China ended the month with a small decline due to the implementation of tightening measures in the property market. Thai equities also corrected as a political deadlock led to continued protests in the capital, Bangkok. However, the proposition of a reconciliation plan by the Prime Minister in early May 2010 saw stock prices rebound after month-end as optimism for a resolution in the near future grew. It is important to note that despite the political turmoil in Thailand, the Thai stock market has outperformed many of its emerging market peers since January of this year, returning 10.4% compared to a 3.7% gain in the MSCI Emerging Markets index.

Latin American markets recorded mixed results with Brazil ending the month down due to overheating concerns and the implementation of a tightening monetary policy. Chile and Peru, on the other hand, recorded gains. In Eastern Europe, Greece remained in the headlines, weighing on regional and global stock markets until an unprecedented US$146 billion bail-out package was announced in early May 2010. Both the European Union and International Monetary Fund will contribute to the loan which will be disbursed over a three-year period. The Turkish market, however, was one of the best performing emerging markets in April as investors cheered the return of the economy to growth in 2010.

REGIONAL UPDATE

ASIA

China's GDP growth exceeded market expectations with an 11.9% y-o-y expansion in the first quarter of 2010. Key drivers included robust growth in domestic investment and consumption. This compared to an increase of 10.7% y-o-y in the final quarter of 2009 and 8.7% y-o-y for the full year. Foreign direct investment (FDI) increased 7.5% y-o-y to US$23.4 billion in the first quarter of 2010 as foreign companies continued to invest in China. Inflationary pressures in March eased with consumer prices increasing 2.4% y-o-y in March, compared to 2.7% y-o-y in February. To curb inflationary pressures, excessive bank lending and overheating in certain sectors, the People's Bank of China (PBOC) raised its cash reserve ratio for banks for the third time this year in April. The PBOC raised the reserve ratio for banks by 50 basis points (0.5%) to 17.0% for the country's largest banks and 15.0% for the smaller banks. Moreover, China announced several measures aimed at cooling the property market. These included higher lending interest rates for second and third mortgages, as well as higher minimum down payments for residential property purchases.

GDP growth in South Korea accelerated in the first three months of 2010, according to preliminary data from the Bank of Korea. The Bank also raised its 2010 growth forecast to 5.2% y-o-y from 4.6% y-o-y. GDP grew 7.8% y-o-y, compared to growth of 6.0% y-o-y in the fourth quarter of 2009 and 0.2% y-o-y for the year. Low interest rates, government stimulus measures coupled with a recovery in the global economy boosted exports, manufacturing and domestic consumption. The Central Bank also left its key interest rate unchanged at a record low rate of 2% to support the economy. Unemployment maintained a downward trend in 2010 with a decline to 3.8% y-o-y in March from 4.4% y-o-y in February. This compared to a 10-year high of 4.8% y-o-y in January. Inflation was within the Central Bank's target range with consumer prices increasing 2.7% y-o-y in February. Investment ratings agency, Moody's raised South Korea's sovereign credit rating to A1 from A2 due to its resilience to the global crisis.

The Reserve Bank of India maintained a tightening monetary policy with its second interest rate hike in April as part of efforts to normalize interest rates and curb inflationary pressures. Both the repo and reverse repo interest rates were increased by 25 basis points (0.25%) to 5.25% and 3.75%, respectively. The cash reserve ratio for banks was also raised to 6.0% from 5.75%. The wholesale price index rose to its highest in more than a year with an increase of 9.9% y-o-y in March mainly because of higher food and fuel prices. The industrial sector continued to record strong growth with industrial production up 15.1% y-o-y in February, its fifth consecutive month of double-digit returns. Key industrial growth drivers included the mining and manufacturing sectors.

LATIN AMERICA

In Brazil, the Central Bank switched to a tightening monetary policy amid overheating concerns and rising inflationary pressures. The Bank raised its benchmark interest rate by 75 basis points (0.75%) to 9.5% from a record-low 8.75%. Consumer prices rose 5.2% y-o-y in March, higher than the 4.8% y-o-y increase in February. Private consumption continued to strengthen in 2010 with retail sales reaching its highest level in two years. Retail sales rose 12.3% y-o-y in February, compared to 10.4% y-o-y in January. Politically, the centrist opposition party, Partido da Social Democracia Brasileira (PSDB), appointed Jose Serra as its presidential candidate. Elections are scheduled for October 3, 2010. President Lula's civil chief of staff, Dilma Rousseff, will be representing the ruling Partido dos Trabalhadores (PT).

AFRICA

Aimed at lowering borrowing costs and increasing consumption, the South African Reserve Bank unexpectedly lowered its key interest rate for the first time since August 2009 by 50 basis points (0.5%) to 6.5%, the lowest in close to 30 years. While retail sales were still down when compared to a year earlier, the pace of decline eased to 1.5% y-o-y in February. Inflation eased to a three-year low and remained within the Central Bank's target range of 3% to 6% for the second consecutive month in March. Consumer prices rose 5.1% y-o-y in March, less than the 5.7% y-o-y increase in February, mainly due to lower transportation and food costs. South Africa's finances continued to improve in the fourth quarter of 2009 with the current account deficit totaling 3.1% of GDP, partly due to a surplus in the trade account. For the year, the deficit shrank to 4.0% of GDP, the lowest since 2005, from 7.3% in 2008. In politics, President Jacob Zuma overwhelmingly defeated a no-confidence vote at the end of March due to the African National Congress parliament majority.

EUROPE

Russia's Central Bank maintained an expansionary monetary policy in April as part of efforts to stimulate the domestic economy. The Bank cut the key benchmark interest rate by 25 basis points (0.25%) to 8.0%. Since April 2009, the interest rate has been reduced by 500 basis points (5%). The government raised US$5.5 billion in international bond sales for the first time in more than 10 years in April, signaling confidence in the Russian economy. Industrial production rose 5.7% y-o-y in March, triple the 1.9% y-o-y increase in February. This brought the growth for the first quarter of the year to 5.8% y-o-y, compared to a decline of 2.6% y-o-y in the final three months of 2009. Key drivers included the manufacturing, mining and utilities sectors.

The Turkish economy grew 6.0% y-o-y in the final quarter of 2010, in part due to poor economic performance in the final quarter of 2009. . This followed four consecutive quarters of decline and a 4.9% contraction in 2009. Growth was also supported by stronger private consumption and government expenditure. Inflationary pressures persisted with consumer prices increasing 9.6% y-o-y in March. Although this was an improvement from the 10.1% y-o-y increase recorded in February, it exceeded the Central Bank's inflation target. An increase in government duties on fuel and cigarettes implemented earlier during the year coupled with higher food and fuel costs pushed up inflation. The government intends to complete the privatization of the country's power distribution sector by the end of 2010. Plans to privatize the power generation sector are also expected to begin this year.

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: 10 May 2010