Asian Equities: FTIF Franklin Asian Flex Cap Fund Update

Sukumar Rajah
Director and Chief Investment Officer-Equities,
Franklin Templeton India
AMC Ltd.

Growth in many Asian economies has been impacted by the global slowdown as a high proportion of the region's gross domestic product (GDP) comes from exports. A fall in export demand and a slowdown in capital flows have been the main culprits. Despite the slow-to-negative growth experienced by these countries, we believe we will see respectable growth in the latter part of 2009 and into 2010, with the International Monetary Fund estimating newly industrialized economies, such as Hong Kong, Singapore, South Korea and Taiwan, growing GDP from negative territory (-5.6% in 2009) to modest positive territory in 2010 (0.8%).¹ In addition, GDP growth is projected to rise in China (from 6.5% in 2009 to 7.5% in 2010) and India (4.5% in 2009 to 5.6% in 2010),¹ two top geographic weightings in FTIF Franklin Asian Flex Cap Fund.

We are exploring two long-term themes in the Asia ex-Japan region. We expect to see strong growth in consumption, with Indonesia and India leading other markets. We believe that positive demographics, such as a wealthier population, will drive domestic consumption and savings, and a low penetration for various consumer categories presents an opportunity for growth. Another long-term theme is infrastructure spending. Countries such as China and Singapore have unveiled stimulus packages that focus on building infrastructure, and aggregate infrastructure spending is estimated to rise to almost US$500 billion in the region for 2010 and 2011.²

When considering an investment for the fund, we focus on companies with strong financial positions, predominant market share or pan-regional presence, and unique strengths, such as new technologies. We also focus on businesses that benefit from macro themes in the region, such as demographic and lifestyle changes, infrastructure development, new technologies, and low penetration of services, such as banking and telecom services.

As a result, our top three country allocations at this time are China, India and Hong Kong. Our top industry allocations are telecom services, semiconductors and equipment, and food, beverage and tobacco. These are areas where we believe there will be growth and penetration opportunities due to changing demographics and infrastructure stimulus.

Two key portfolio holdings that meet our criteria are Taiwan Semiconductor and Singapore Telecom. We believe Taiwan Semiconductor is a leader in developing next-generation technology and holds a dominant market position with strong pricing power. It has substantial cash reserves and positive free cash flow, helping it to better navigate the current macro-economic environment. Singapore Telecom stands to potentially benefit from the growth promise of Asia's telecom sector. It operates in developed markets, and it is establishing a presence in developing markets via stakes in leading wireless operators such as AIS in Thailand, Telkomsel in Indonesia, Globe in the Philippines and Bharti in India.

Average Growth in Private Consumption(1996-2008)

Source: Citigroup Asia Valuator, October 2008.

1. International Monetary Fund, Regional Economic Outlook for Asia and Pacific, May 2009.

2. Credit Lyonnais Securities Asia. March 2009.

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