November Overview

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

Overview

The MSCI Emerging Markets index ended the month of November 2009 with a 4% gain in US$ terms. Many of the emerging markets continued to show improving economic conditions, which resulted in continued strong inflow of funds into emerging equity markets.

Year-to-date, emerging markets were up 72%. There was some concern towards the end of the month when the Dubai government-owned Dubai World announced a six-month debt standstill. The group, struggling under US$59 billion of debt, would not be meeting their debt obligations for the next six months while a restructuring is arranged. The negative news impacted markets globally, particularly in Asia and Europe because a number of banks are exposed to Dubai debt and several international construction companies have had large contracts in Dubai. Most markets rebounded quite quickly after it was ascertained that damage to companies outside of the gulf region would be very limited.

As we have said in the past, in any bull market we expect that there will be corrections along the way. In our view, these corrections can be quite healthy, because to us it means that valuations will become more reasonable, presenting buying opportunities. This kind of volatility in emerging markets is what we expect and why it is so important to have a long-term investment horizon. We view these opportunities as a time to continue holding quality investments and to increase our holdings in selected stocks that we believe, over a five-year time frame, will continue to show stable financing and good earnings.

Regional Update

Asia

In China, economic data released during the month continued to show signs of improvement. Foreign direct investment (FDI) recorded growth for the second consecutive month in September, following contractions between October 2008 and July 2009. FDI rose 19% y-o-y in October to US$7.9 billion. This brought the year-to-October total inflows to US$63.7 billion. The decline in exports continued to moderate in October with a 14% y-o-y drop compared to a 15% y-o-y decrease in September and 26% y-o-y fall in May 2009. Value added output growth also continued to strengthen. Output grew 16% y-o-y in October, compared to an increase of 14% y-o-y in September, and its strongest growth rate thus far this year. The increase has been mainly driven by infrastructure investment resulting from the government's stimulus measures. U.S. President 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.

South Korea's trade balance continued to improve in October. The decline in exports eased to 8% y-o-y in October from double-digit drops experienced earlier during the year. The improvement in exports over the year resulted from currency devaluation which boosted the competitiveness of Korean exports as well as a rise in global trade. The signing of a free trade agreement with the European Union in early 2010 could further support export growth. Imports also posted their smallest contraction during the month. The trade surplus rose to US$3.8 billion, nearly four times the US$1 billion, a year earlier. Industrial production growth also strengthened largely due to a recovery in external demand. Production growth increased to 11% y-o-y in September from 1% y-o-y in August.

Latin America

Pointing towards a continued recovery in Brazil's retail sector, sales increased 9% y-o-y in September and 4% y-o-y for the first nine months of 2009. This compared to a growth of 5% y-o-y in August. While the main driver of growth was the automobile industry, sectors such as clothing, office supplies and publishing also recorded positive sales volume growth. The industrial sector continued to improve with output rising 1% m-o-m in September. This marked the ninth consecutive month of growth. However, on a y-o-y basis, industrial production was 8% lower. This, was however, much better than the 15% y-o-y decline in April 2009. In October, exports, in the meanwhile, recorded their smallest annual decline in four months with a 23% y-o-y decline to US$14.1 billion. Imports were down 26% y-o-y, its smallest contraction since March 2009. A trade surplus of US$1.3 billion was recorded for the month, unchanged from a year earlier.

Mexico's GDP declined 6% y-o-y in the third quarter of 2009, compared to a contraction of 9% in the preceding two quarters, an indication that the worst may be over. Growth in the mining, as well as easing contractions in sectors such as services, commerce activity and manufacturing, supported the economy. The 2010 budget received final approval from the Congress in November and included a 1% increase in the current sales tax to 16%, an increase in income tax for high earning individuals and businesses to 30% in 2010-12 and higher levies on beer and tobacco. The 2% consumption tax, was however, rejected while the 4% tax on telecommunications services was reduced to 3%. Government expenditure will also be increased in areas such as infrastructure, agriculture and education while reducing the government's operational costs by implementing personnel cuts and salary freezes.

Africa

The South African economy returned to growth in the third quarter of 2009. GDP rose 1% y-o-y, 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. Inflationary pressures continued to ease, with consumer prices reaching a two-year low of 6% y-o-y in September. This was in line with the Central Bank's 6% target ceiling. The country's current account deficit is expected to decline to 5% of GDP in 2009 as imports contract at a faster pace than exports as a result of the weak economy.

Europe

The Russian Central Bank maintained an expansionary monetary policy in November to stimulate lending. The Bank reduced its key refinancing interest rate by 50 basis points (0.5%) to 9%. This brought the cumulative reduction in the rate to 4% since April 2009. In an effort to strengthen relations with Sri Lanka, Foreign Minister Sergey Lavrov visited the country at the end of October. In addition to discussions on a number of subjects such as terrorism, international affairs and economic co-operation, several bilateral agreements relating to areas such as education, culture and tourism were also signed. Russia and Cyprus signed an agreement to avoid double taxation and improve the transparency of economic relations between the two countries.

The Turkish Central Bank maintained an expansionary monetary policy in November to support the country's economic recovery. The Bank cut its benchmark borrowing interest rate by 25 basis points (0.25%) to 6.5%. This was smaller than the 0.5% cut seen in the last six consecutive months. Inflation continued to ease with consumer prices remaining well below the Bank's year-end target. Aimed at boosting bilateral ties, Turkey and Jordan agreed to sign a Free Trade Agreement (FTA), which was previously stalled, by the end of the 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: 3 December 2009