Quarterly Commentary: 1Q 2009

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

Overview

Emerging stock markets ended the first quarter of 2009 with a positive return after a recovery in March reversed the declines recorded in the first two months. The MSCI Emerging Markets index returned an average of 1.0% in US$ terms for the three-month period. Latin American markets were the top performers with the MSCI Latin American index returning 4.9% in US$ terms. Brazil and Chile recorded double digit gains of 12.5% and 13.6%, respectively, in US$ terms, as both economies benefited from higher commodity prices. Mexico, however, underperformed, recording a return of -14.0% in US$ terms, due to its dependence on the U.S. economy, its largest trading partner.

Stock markets in Eastern Europe were the weakest performers during the quarter, as investors remained concerned about the financial state of European banks. Russia, however, bucked the trend, ending the quarter with a positive return of 5.9% in US$ terms, due to a rebound in commodity prices. Turkey and South Africa underperformed its emerging market counterparts, in part due to weaker domestic currencies.

In Asia, while Pakistan underperformed in 2008, it was the top performer in the first quarter of 2009. The MSCI Pakistan index rose 37.7% in US$ terms, as the government worked towards financial stability with support from the International Monetary Fund in the form of an US$7.6 billion program. Elsewhere in the region, China, Taiwan, Indonesia and the Philippines also ended the quarter in positive territory.

Regional Update

Chinese Premier Wen Jiabao remained confident that China would achieve GDP growth of 8.0% y-o-y in 2009. Economic growth slowed to 9.0% y-o-y in 2008, from 13.0% y-o-y in 2007, mainly due to lower export growth and industrial output. The government has, been focusing on boosting consumption, especially in the rural sector, which is expected to at least partially offset the impact of lower exports on GDP growth. Capital expenditure accelerated in 2009, as a result of the government's US$585 billion fiscal stimulus package, further supporting the domestic economy. Fixed asset investment increased 26.5% y-o-y in the first two months of the year due to the government's focus on infrastructure development. Credit growth also increased in January, reaching a record high, as government efforts to boost lending continued. In addition to implementing numerous fiscal measures, China has also been using its vast foreign exchange reserves to foster growth by helping domestic companies expand internationally and to secure the continued supply of resources. Loan agreements with Russia and Brazil were also signed in exchange for the provision of future energy supplies. One year after experiencing its highest inflation in more than a decade, consumer prices recorded its first decline since 2002 in February 2009. Consumer prices fell 1.6% y-o-y due to lower commodity and food prices.

The South Korean economy grew 2.6% y-o-y in 2008, nearly half the 5.0% y-o-y growth recorded in 2007, mainly due to weaker domestic demand and exports. Aimed at supporting the domestic economy, the government unveiled a record US$20.8 billion (3.1% of 2009 GDP) supplementary budget in March. The budget includes US$12.9 billion in additional fiscal expenditure to create 550,000 jobs as well as support small and medium-sized enterprises and exporters. Unemployment reached 3.9% in February, the highest in more than three years. Funds will also be allocated to boost domestic demand and help low income earners. While the government expects the additional fiscal spending to boost GDP by 1.5%, it still expects the economy to contract by 2.0% y-o-y in 2009. In an effort to support its trade sector, South Korea reached a provisional agreement with the European Union to abolish tariffs and liberalize bilateral trade relations. A final agreement is expected shortly. After reducing its benchmark interest rate by 50 basis points in January and February, the Central Bank left the interest rate unchanged at a record low of 2% in March, due to improving domestic credit liquidity and a volatile foreign exchange market. Moreover, with foreign exchange reserves in excess of US$200 billion, the country is in a strong position to meet its financial obligations.

GDP growth in Mexico slowed to 1.3% y-o-y in 2008 from 3.2% y-o-y in 2007. Growth is expected to decline between 0.8% and 1.8% in 2009 as the global financial crisis and slowing growth in the U.S. economy, its largest trade partner, impacts export demand and consumer spending. Retail sales declined 4.6% y-o-y in January, after reaching a peak in June 2008. Lower oil prices and demand from the U.S. led exports to contract significantly. Exports declined 29.6% y-o-y in February, while imports declined 30.7% y-o-y, resulting in a trade deficit of US$491 million. The sharp fall in both exports and import led the deficit to shrink from January's US$1.6 billion. The government, however, announced a new fiscal stimulus package to support the economy in January. Key emphasis was placed on the labor and housing markets, inflation and public sector expenditure. The Central Bank lowered its key interest rate by 150 basis points (1.5%) to 6.75% to further stimulate the domestic economy. Inflationary pressures continued to ease with consumer prices reaching a 3-month low of 6.2% y-o-y in February.

Brazil's economy grew 1.3% y-o-y in the final three months of 2008, slower than the 6.8% y-o-y growth in the preceding quarter. This brought the full-year growth to 5.1% y-o-y. Lower exports and private consumption as well as weaker growth in the industrial and services sectors took a toll on the economy. The government announced fiscal stimulus measures which included a 12% increase in minimum wages and policies aimed at tackling poverty. The Central Bank adopted a loosening monetary policy by cutting its key interest rate by 250 basis points (2.5%) to 11.25% to reduce borrowing costs and rejuvenate the domestic economy. These measures could support domestic demand going forward. In contrast, encouraging economic data was reported in the first quarter of 2009. The current account deficit narrowed significantly in February, as higher commodity prices and greater demand for soft commodities resulted in a trade surplus. The trade balance recorded a surplus of US$1.8 billion in February, reversing January's US$518 million deficit. Lower portfolio investment outflows and higher foreign direct investment (FDI) inflows were also recorded in February. FDI inflows for the 12-month period ended February totaled US$43.3 billion, as investors remained attracted Latin America's largest economy. The country's foreign debt reduced to US$195.8 billion in February, from US$199.6 billion in January.

GDP growth in South Africa slowed to 3.1% y-o-y in 2008, from 5.1% y-o-y in 2007. This was mainly due to weakness in the manufacturing sector. The hosting of the 2010 World Cup could, however, support the tourism, services and infrastructure industries. A 787 billion Rand (about US$80 billion) fiscal stimulus package, which entailed plans to increase government spending on infrastructure, education and health in the next three years, was also announced. This would lead to a budget deficit of 1% in the fiscal year 2008-9 and 3.9% in 2009-10. The Central Bank also cut its benchmark interest rate by 200 basis points (2.0%) to 9.5% in view of slowing global and domestic growth. Inflationary pressures, however, increased in February as a result of a new benchmark consumer price index which gives the services sector a higher weighting. Consumer prices rose 8.6% y-o-y, from January's 8.1% y-o-y increase. Higher insurance and medical costs coupled with an increase in oil costs were the key culprits. Politically, South Africa's general elections will be held on April 22, 2009. The ruling African National Congress (ANC) Party is widely expected to emerge victorious, increasing party leader Jacob Zuma's chances of becoming the country's next president.

The Russian economy grew 5.6% y-o-y in 2008, compared to GDP growth of 8.1% y-o-y in 2007. The global financial crisis coupled with a correction in oil prices led to slower GDP in the latter half of the year. The government remained focused on implementing measures to help the economy weather the global financial crisis. Spending on these measures, and improved liquidity as a result of Central Bank efforts, is expected to total 12% of GDP in 2009. The federal budget deficit is expected to reach about 8% of GDP this year. The government has authorized the use of the Reserve Fund to finance the deficit. The Central Bank adopted a tightening monetary policy in February in an effort to ease downward pressure on the Rouble. The Bank raised its key lending interest rate by 100 basis points (1.0%) to 10.0%. Central Bank estimates indicated a sharp slowdown in the pace of net capital outflows to US$4.5 billion in February, from US$29 billion in January. Foreign exchange reserves remained a respectable US$385 billion, providing the government with funds to support the domestic economy.

Turkey's GDP grew 1.1% y-o-y in 2008, as a decline in consumption, investment and exports dragged growth in the final quarter of the year. In view of the difficult economic conditions and tight credit conditions, the Central Bank maintained a loose monetary policy. The benchmark borrowing interest rate was cut by 450 basis points (4.5%) to 10.5%, a historically low, during the quarter. Further monetary loosening is expected to continue in view of the weak domestic economy. The government also continued to implement fiscal stimulus measures during the period. Measures to improve the foreign exchange liquidity in the banking sector were also announced. Consumer prices eased to 7.7% y-o-y in February, as a fall in food prices and weaker domestic demand eased inflationary pressures. Unemployment, however, increased to 13.6% y-o-y in December, from 12.3% y-o-y in November. The European Investment Bank (EIB) granted Turkey a loan of EUR 2.7 billion in 2008 for infrastructure development and assistance for small and medium enterprises. Politically, the ruling Justice and Development Party (AKP) won the local elections albeit with lower support levels than in previous elections. The government is now expected to focus on implementing fiscal reforms and reaching a new loan agreement with the International Monetary Fund (IMF) to support the economy.

Outlook

We believe that the longer-term outlook for emerging markets remains positive due to their relatively strong fundamental characteristics and faster growth than their developed counterparts. Fiscal measures and easing monetary policies undertaken by governments and central banks globally should also help rejuvenate economic growth in emerging markets. We expect emerging markets to play key roles in 2009 and beyond. In recent years, the largest emerging markets, the BRIC countries, were among the fastest growing economies in the world and we expect this trend to continue. The four markets together account for more than 40% of the world population. We expect China and India, the world's two most populous countries, to post positive and significant GDP growth this year. Domestic demand growth in many emerging markets is another area to be excited about. China continues to take great strides towards becoming a major global player. The Chinese economy is expected to grow 7-8% in 2009 and its foreign reserves total close to US$2 trillion. Moreover, Brazil and Russia are resource rich countries and although there has been a recent fall in commodity prices, the longer trend for commodity prices is up and these countries will benefit from global demand for oil, steel, aluminum, pulp, and other commodities.

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: 06 April 2009