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OCTOBER 2010 BRICs Remain Attractive The BRIC markets (Brazil, Russia, India and China) continue to march higher as their economic recovery remains robust. In addition to the strong reported macro-economic data, financial and fiscal indicators also remain positive. As a result of the continuing growth in BRIC economies, we have seen a huge influx of funds into the BRIC stock markets. In the five-year period ended September 2010, portfolio inflows into BRIC markets totalled US$104 billion.1 Dr. Mark Mobius Executive Chairman, Templeton Emerging Markets Group These four markets represent a very economically diverse group, accounting for about 40% of the world’s population and 30% of the global land area. These markets offer a number of important advantages and there are very good reasons why we believe investors should adopt a positive long-term view. Most important, while global growth has slowed, BRIC markets are still expected to grow at a much faster rate than developed markets. In 2010, BRIC markets are forecast to grow at an average of 7.9%, nearly triple the 2.7% growth estimated for developed markets.2 Although the slowdown in the global economy had an impact on BRIC markets, these economies are becoming more domestically driven. Government expenditure in areas such as infrastructure as well as private domestic consumption has been, at least partially, offsetting the decline in growth resulting from weaker exports. The services sector has also been gaining in importance, especially in China and India. CONSUMERS Another important factor contributing to the growth in BRIC markets is the consumer. We have been stressing the importance of emerging market consumers since there are so many more of them than in developed markets. As mentioned above, BRIC markets account for about 40% of the world’s population. With economic growth accelerating and population growth decelerating, per capita income is on the rise. With rising per capita income and strong demand for consumer and other goods, the earnings growth outlook for consumer-oriented stocks remains positive. COMMODITIES In addition to consumers, another interesting investment theme is commodities. In general, we expect commodity prices to continue their upward trend over the long-term because of continued demand from emerging markets and a relatively inelastic supply. Infrastructure development in emerging markets has also led to continued demand for hard commodities, such as metals. Demand for and prices of soft commodities such as sugar, selective grains and cocoa has also increased. Looking at the stability and safety of BRIC markets, it is important to note the accumulation of foreign exchange reserves that puts these economies in a much stronger position to weather external shocks than they were about ten years ago. Foreign reserves, for example, in China are the largest in the world, totalling more than US$2.6 trillion. Russia has more than US$400 billion, while India and Brazil have more than US$200 billion. BRAZIL Focusing on the individual markets, Brazil is the largest investable market in Latin America. It is a strong commodity producer and exporter and is likely to benefit from rising global FRANKLIN TEMPLETON INVESTMENTS MARKET UPDATE OCTOBER 2 demand, including demand from China, for energy, metals and other commodities. It is also a country with a large and growing consumer base. Brazil’s economy is diversified and largely domestically driven, as exports account for less than a quarter of Gross Domestic Product (GDP). Moreover, Brazil will be hosting the World Cup in 2014 and the Olympics in 2016, so it is expected to invest significantly in infrastructure that should help drive economic growth in the coming years, as well as improve the basis for stronger sustainable growth in the long-term. RUSSIA In general, our long-term outlook for Russia is positive. The country has the world’s third-largest foreign exchange reserves. Moreover, Russia owns a large proportion of the world’s natural resources and many of the country’s commodity companies are among the world’s low-cost producers. It is also interesting to note that based on current valuations, the Russian market is among the cheapest in the emerging market universe. INDIA India’s economy is also expected to continue to record sustained economic growth in the future. The country is a good example of where entrepreneurship has taken hold of the economy and the private sector is thriving despite the government bureaucracy and poor infrastructure. The market in India also benefits from a strong tradition of saving and India, compared to China, has a lower dependence on exports to the US as a percentage of its GDP, which may help to partially insulate it from a possible US economic slowdown. The country is also one of the most popular locations for outsourcing by developed markets. CHINA China is one of the fastest growing economies in the world and continues to display strong financial and economic fundamentals. The country recorded strong GDP growth in the second quarter of 2010 and toppled Japan as the world’s second largest economy after the US, solidifying the country’s growing political and economic importance. With a consumer base of 1.3 billion people, consumerism thus has been flourishing in China. Rising per capita income and strong demand for consumer goods and services means the earnings growth outlook for these stocks is positive. Foreign direct investment continues to grow as international investors remain attracted to China's booming economy. Most important for value investors, the current valuations of BRIC markets remain more attractive than developed markets. As at 31 October 2010, the MSCI BRIC Index had a P/E of 14 times, cheaper than the MSCI World Index which was trading at a P/E of 16 times. Of the four markets, Russia is down to single-digit P/Es, making it especially appealing. There will be corrections along the way, but over the long-term, we expect BRICs to outperform, reflecting the economic growth in those countries. Emerging market investments can be volatile and investors should be prepared to hold an investment for the long-term. FOOTNOTES 1. Source: EPFR Global 2. Source: International Monetary Fund, World Economic Outlook, October 2010 IMPORTANT INFORMATION Copyright © 2010. Franklin Templeton Investments. All rights reserved. This document is intended to be of general interest only and does not constitute legal or tax advice nor is it an offer for shares or an invitation to apply for shares of any of the Franklin Templeton Investments’ fund ranges. Nothing in this document should be construed as investment advice. Franklin Templeton Investments has exercised professional care and diligence in the collection of information in this document. However, data from third party sources may have been used in its preparation and Franklin Templeton has not independently verified, validated or audited such data. Opinions expressed are the author’s at publication date and they are subject to change without prior notice. Any research and analysis contained in this document has been procured by Franklin Templeton Investments for its own purposes and is provided to you only incidentally. Franklin Templeton Investments shall not be liable to any user of this document or to any other person or entity for the inaccuracy of information or any errors or omissions in its contents, regardless of the cause of such inaccuracy, error or omission. The value of shares in a Franklin Templeton Investments’ fund and income received from it can go down as well as up, and investors may not get back the full amount invested. Past performance is no guarantee of future performance. Currency fluctuations may affect the value of overseas investments. When investing in a fund denominated in a foreign currency, your performance may also be FRANKLIN TEMPLETON INVESTMENTS MARKET UPDATE OCTOBER 3 affected by currency fluctuations. In emerging markets, the risks can be greater than in developed markets. Investments in derivative instruments entail specific risks more fully described in the Fund's Prospectus. For more information about any Franklin Templeton Investments’ fund, UK investors should contact: Franklin Templeton Investments, Telephone: 0800 305 306, Email: [email protected] or write to us at the address below. In Denmark, Finland, Norway or Sweden, please contact: Franklin Templeton Investment Management Limited, Birger Jarlsgatan 4, SE-11434, Stockholm, Sweden. Telephone: +46 (0)8 545 012 30, Email: [email protected]. Issued by Franklin Templeton Investment Management Limited (FTIML). Registered office: The Adelphi, 1-11 John Adam Street, London WC2N 6HT. In the UK, FTIML is authorised and regulated by the Financial Services Authority and is authorised to conduct investment business in Denmark by the Finanstilsynet, in Sweden by the Finansinspektionen, in Norway with Kredittilsynet, and in Finland with Rahoitustarkastuksen. FURTHER INFORMATION: UK Investors Tel: 0800 305 306 Email: [email protected] www.franklintempleton.co.uk Nordic Investors Tel: 46 (0) 8 545 012 30 Email: [email protected] www.franklintempletonnordic.com