Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Templeton Emerging Markets Overview AS OF DECEMBER 2013 Templeton Emerging Markets December 2013 By Dr. Mark Mobius, Executive Chairman, Templeton Emerging Markets Group OVERVIEW Major events driving performances in emerging markets in the final quarter of 2013 included the US Federal Reserve’s decision to taper its asset purchases by US$10 billion/month from January 2014 onwards while maintaining interest rates at low levels for the foreseeable future. Elsewhere, notable developments included an increase in China’s interbank interest rates as well as political unrest in Turkey and Thailand. Against this background, the MSCI Emerging Markets Index returned 1.9% in US Dollar terms for the quarter. Top performing markets included India, Greece and Egypt; all three markets ended the three-month period with double-digit gains. The Bharatiya Janata Party’s (BJP’s) strong standing in state elections suggested that the BJP, seen as somewhat more probusiness than the incumbent Congress-dominated government, was well placed ahead of general elections scheduled for later this year. Markets also welcomed the decision by the Reserve Bank of India to leave interest rates unchanged. At the other end of the spectrum, Turkey, Thailand and Colombia underperformed. A disappointing performance in November dragged down the Colombian market, while unrest in Thailand and Turkey impacted equities and domestic currencies in those markets. REGIONAL UPDATE ASIA GDP growth in China accelerated to 7.8% y-o-y in the third quarter of 2013, from 7.5% y-o-y in the second quarter of 2013, as government stimulus measures drove investment. On track to achieving the government’s full-year growth target of 7.5%, GDP grew 7.7% y-o-y in the first nine months of 2013. The government concluded its third plenary meeting in November, announcing plans to implement reforms related to state-owned enterprises, land and fiscal tax, financial liberalization, environmental conservation and relaxation of the one-child policy. While growth in industrial production eased to 10.0% y-o-y in November, retail sales expanded 13.7% y-o-y, its fastest pace in the first 11 months of 2013. Fixed asset investment increased 19.9% y-o-y in the year-todate period until November 2013, in line with the 20.1% y-o-y growth in the first 10 months of 2013. A rebound in the global economy led export growth to increase to 12.7% y-o-y in November, from 5.6% y-o-y in October. China and the US agreed to remove some trade barriers during annual bilateral talks which were held in December. Inflationary pressures eased, with the consumer price index moderating to 3.0% y-o-y in November, from 3.2% y-o-y in October. The South Korean economy grew 3.3% y-o-y in the third quarter of 2013, higher than the 2.3% y-o-y growth recorded in the second quarter. Key growth drivers included investment in fixed capital and government expenditure. The Bank of Korea left its key interest rate unchanged at 2.5% for the seventh consecutive month in December due to an improved growth and inflation outlook. The consumer price index increased to 0.9% y-o-y in November from 0.7% y-o-y in October, remaining below 1% for the third consecutive month. Unemployment fell to 2.9% in November, its lowest level in more than 15 years as hiring in the tourism and consumer-related sectors increased. South Korea and Australia signed a free trade agreement (FTA) in December. President Park Geun-hye’s first trip to Western Europe since her inauguration included visits to France, the United Kingdom and Belgium. Park also held talks with presidents of the European Council and European Commission to maximize synergies in the South Korea-European Union FTA. GDP growth in India accelerated to a better-than-expected 4.8% yo-y in the third quarter of 2013, from a four-year low of 4.4% in the second quarter, partially due to growth in agriculture and exports. The Reserve Bank of India left its benchmark interest rate unchanged at 7.75% in December, following increases in September and October. The wholesale price index increased to 7.5% y-o-y in November, from 7.0% y-o-y in October, while the consumer price index rose to 11.2% y-o-y, from 10.2% y-o-y. Elections were held in five states in the last quarter of 2013, where the BJP gained a majority in three states, strengthening its position ahead of the general elections in 2014. In a move toward greater reform, the parliament passed the Lokpal and Lokayuktas Bill 2011, which requires the establishment of an independent ombudsman to tackle corruption at a national level as well as anti-corruption bodies in individual states. LATIN AMERICA Brazil’s GDP growth eased to 2.2% y-o-y in the third quarter of 2013, from 3.3% in the second quarter, mainly due to weakness in investment and agriculture. Investment declined 2.2% q-o-q while agriculture contracted 3.5% q-o-q in the third quarter. Foreign direct investment (FDI) increased to US$8.3 billion in November from US$5.3 billion in October, bringing the total for the 12-month period to US$62.8 billion. The current account deficit narrowed to US$5.1 billion in November from US$7.1 billion in October, mainly due to a surplus in the trade balance. This brought the current account deficit to US$81.1 billion for the 12-month period ended November 2013. The Central Bank raised its benchmark interest rate by 100 basis points (1.0%) to 10.0% during the quarter. The Bank has raised rates by a total of 275 basis points (2.75%) since it adopted a tightening policy in April 2013. The consumer price index remained at 5.8% y-o-y in November, below the Central Bank’s upper target limit of 6.5%. Ratings agency Moody’s lowered its outlook on Brazil’s Baa2 sovereign rating to stable from positive. AFRICA The South African economy grew 1.8% y-o-y in the third quarter of 2013, the slowest pace in more than four years. This compared to a revised 2.3% y-o-y increase in the second quarter. The slowdown was primarily due to labor strikes in the automobile industry, which led manufacturing output to contract 6.6% y-o-y in the third quarter. The manufacturing sector, however, recovered in October following the end of the strikes, reporting a growth of 1.5% y-o-y. Growth in the mining and retail sectors also improved in October. FDI reached F R AN K LI N TEM PLETON I NVES TM EN TS its highest level since the 2009 recession in the third quarter, with inflows totaling US$4.7 billion. Moreover, foreign portfolio investment flows totaled US$4.9 billion, a three-year high, driven by global interest in domestic bonds. The South African Reserve Bank cut its 2013 economic growth forecast to 1.9% y-o-y from 2.0% y-oy. In addition, the Bank maintained its benchmark interest rate at 5.0% in November to support the domestic economy. The consumer price index eased to 5.3% in November, from 5.5% in October. EASTERN EUROPE Russia’s GDP grew 1.2% y-o-y in the third quarter of 2013, the same rate as in the second quarter. A disappointing harvest due to poor weather conditions was behind the weak growth rate. The Central Bank left its main lending interest rate unchanged at 5.5% during the quarter despite slowing economic growth. The consumer price index edged up to 6.4% y-o-y in November 2013, from 6.3% y-o-y in October 2013, remaining outside the Central Bank’s 5% to 6% target range for the 15th consecutive month. Higher food price inflation was the main reason for the increase. Fixed investment declined 1.8% y-o-y in the first 10 months of 2013, compared to an increase of 9.1% y-o-y in the same period in 2012. Russia and South Korea signed a memorandum of understanding (MOU) allowing South Korean companies to invest in a Russian-led project in North Korea. Additionally, banks from both countries signed MOUs worth US$3 billion to boost investment. Turkey’s GDP growth exceeded market expectations as low real interest rates and strong credit growth continued to support the economy. GDP grew 4.4% y-o-y in the third quarter of 2013, in line with the 4.5% y-o-y increase recorded in the second quarter. Private consumption and investment were important growth drivers during the third quarter. The Central Bank left its key interest rates unchanged during the quarter. The Bank’s overnight lending rate remained at 7.75%, the overnight borrowing rate at 3.50%, and the one-week repo rate at 4.50%. Inflation edged down in November, with the consumer price index easing to 7.3% y-o-y from 7.7% y-o-y in October. President Abdullah Gul met his Mexican counterpart President Enrique Pena Nieto, upon which both leaders signed 11 agreements aimed at increasing political, trade, investment and tourism relations between the two nations. OUTLOOK 2014 could be an important year for many emerging markets, establishing trends that could play out through much of the remainder of the decade. In particular, Chinese government initiatives announced in late 2013 could have far-reaching significance. Moreover, a number of major emerging markets will see major elections in 2014—Indonesia, South Africa, Thailand and India in the first six months, and Turkey, Brazil and Nigeria later on, which could have an impact on the direction of their respective economies. The strengths apparent in many emerging markets, such as strong economic growth, solid public and consumer finances, rich natural resources and favorable demographic trends, should, we think, continue to support their development going forward. We believe many emerging markets possess considerable growth potential. For example, Southeast Asia has been seeing a notable extension of growth and wealth away from traditional economic hubs, with previously underdeveloped regions starting to see significant catch-up growth. Russia continues to see gradual reform as the authorities seek foreign investment, and equity valuations there remain exceptionally low, in our view. Some South African consumer companies are starting to enjoy solid growth, both domestically and elsewhere on the continent. We have also continued to see appealing long-term investment opportunities across a range of sectors in Central and South America. TEMPLETON EMERGING MARKETS OVERVIEW 2 In addition, we believe that smaller companies in many markets could represent a particularly rich source of investment prospects. Among frontier markets, Kenya is home to a ground-breaking mobile money transfer system that could have implications for emerging markets globally, while microfinance initiatives in Bangladesh are justly famous. In Egypt, we have continued to find companies thriving and investing even though the news headlines may sometimes be alarming. As is often the case, adverse shortterm news flow in emerging markets typically creates attractive investment opportunities, in our opinion. As long-term fundamental investors, we do not make short-term predictions for share prices, but longer-term developments that look likely to gain traction in 2014 could drive solid growth in emerging economies and their stock markets for years into the future. Feature of the Month: Notes on Georgia from Dr. Mark Mobius My team and I recently traveled to Georgia, a small country in the Caucasus Mountains, straddling the border between Europe and Asia. Why are we interested in Georgia? One word: reform. Georgia, which can be considered a frontier market, is on the cusp of burgeoning change. Georgia gained independence from the Soviet Union in 1991, is strategically located east of the Black Sea, and is bordered by Armenia, Azerbaijan, Russia and Turkey. To understand what is happening in Georgia today, we need to go back in history. Not only has Georgia been the victim of many invasions, but the importance of Russia in its history cannot be underestimated. Russian dictator Joseph Stalin, who led the USSR (Union of Soviet Socialist Republics) from the mid-1920s until his death in 1953, was Georgian. Georgia controls much of the Caucasus Mountains and the routes through them, giving it strategic importance in the region. The BakuTbilisi-Ceyhan oil pipeline, the Baku-Tbilisi-Erzurum (South Caucasus) gas pipeline, and the Kars-Tbilisi-Baku Railway are all part of a strategy to capitalize on Georgia's key location between Europe and Asia, and help develop its role as a transit point for gas, oil and other goods. Our team’s entry point into the country was the beautiful resort town of Batumi on the Black Sea coast. It was immediately evident that Georgia was embracing change and making a statement of progress through its architecture. As we landed, the airport navigation tower at Batumi looked like a jewel at night, with hundreds of lights surrounding the tower and the adjacent circular building. The Sarpi Customs Terminal Building, designed by German architect Jürgen Mayer-Hermann, is an incredible shape formed into a series of curves and abutments. As we drove through the city, I was struck by the sight of the most modern McDonald’s restaurant in the world I’ve ever seen. It looked like a rocket ready to take off. The old part of the city has been beautifully restored, featuring a variety of architectural styles from empire and art deco to the traditional Georgian structures topped with unusual steeples. Traveling around the country, I was awestruck by the interesting new architecture, as well as the extensive renovation of older structures taking place. Growth and Change Since the “Revolution of the Roses” or “Rose Revolution” in 2003 that marked a shift in political power and the end of the era of Soviet leadership, Georgia has undertaken dramatic reforms. While it suffered market setbacks in 2008–2009, Georgia has seen strong annual GDP growth rates of 6% to 7% from 2010–2012. Georgia’s debt-to-GDP ratio is a modest 36.3%, and inflation appears F R AN K LI N TEM PLETON I NVES TM EN TS contained. Growth drivers for the economy include tourism and agriculture, in addition to substantial overseas workers’ remittances that have helped drive an increase in foreign reserves. Tourism is on the rise in Georgia with about five million arrivals each year, exceeding Georgia’s population of four million. Tourists are attracted not only to seaside resorts such as Batumi on the Black Sea but also mountain resorts as well as the capital Tbilisi. Almost half of the tourists come from neighboring Turkey, followed by Azerbaijan, Armenia, and Russia. Georgia receives over US$1 billion in foreign exchange annually from tourism. In 2013, the Lonely Planet guide named Georgia as one of its top 10 “Best Value Destinations”. Although international hotel chains such as Marriott, Radisson, Holiday Inn, Sheraton and others have entered the market, current projections indicate that there will be a need for more hotel rooms since the growth of tourist numbers has been increasing at double-digit rates. Georgia has a lot of attractions, including 12,000 historical and cultural monuments (of which four are on the UNESCO World Heritage List), 103 resorts, eight national parks and over 2,000 mineral water springs. Gaming is legal in the country and there are now eight casinos, mostly in the seaside resort city of Batumi, which draws over 100,000 tourists annually, mostly from Turkey. Agriculture is the country’s largest employer accounting for about 50% of the employed population. With many soil types and microclimates in addition to plentiful rainfall, the country’s ability to grow a wide range of fruits and vegetables is significant with export markets in Germany, Italy and Lithuania. Georgian wines are famous in Russia and the former Eastern bloc nations. Organic farming is a strong point for the country and attractive to European importers. However, there is a need for more investment and technology to increase yields, which are currently quite low. What really drew me and my team to Georgia was its recent transformation toward a modern and fair society, one where the government appears to be treating its citizens properly. The most impressive thing I learned from talking to people living in Georgia was how much the old ways had been discarded, and how the government had become more efficient. The World Bank’s “Ease of th Doing Business” survey ranked Georgia 8 out of 189 countries in 2013, a dramatic move up from its ranking of 133 in 2005. Georgia’s Public Service Administrative Building, which handles land registration and passport issues under one roof, is a showcase of transparent and modern public administration in the country. In general, I found Georgia’s infrastructure truly impressive. I was also impressed by what appeared to be a dramatic reduction of corruption in Georgia. In fact, one of the key questions I ask any government leader I have the opportunity to meet with is: What specific reforms are you undertaking to reduce corruption? I also want to know what plans are in place to grow the economy and reduce taxation while making government more efficient. Our team had the pleasure of meeting with Bidzina Ivanishvili, who was Georgia’s Prime Minister at the time, to discuss our concerns and talk about opportunities in the country. In 2013, the Heritage Foundation’s Economic Freedom Index, which measures the economic freedom of countries based on trade freedom, business freedom, investment freedom, and property rights, ranked Georgia 21 out of 161 countries. Starting a business is relatively easy in Georgia, with registration possible in one day. Foreigners do not require special work permits, and nationals from more than 80 countries can enter Georgia and stay for 360 days without a visa. In addition, the tax structure in Georgia is relatively simple and attractive to investors. As in any country, there are revisionists in Georgia who want to go back to the old ways. Also like other countries, there still is corruption, although it has been dramatically reduced. These are TEMPLETON EMERGING MARKETS OVERVIEW 3 problems we should be aware of, and we must watch Georgia’s relations with Russia to ensure they remain on an even keel. Of course, investing in any frontier market— generally considered the smaller, less-developed subset of emerging markets—carries heightened risks, including potential price volatility, market illiquidity and lack of established legal, political, business and social frameworks to support securities markets. As Templeton seeks potential investment opportunities around the globe, the thing we look for first and foremost is growth potential. Economic growth can act as a driver of a company’s growth and potential profitability, and that is something we want to see. We look for well-managed companies that we think are capable of taking advantage of a country’s economic growth. We also aim to visit as many companies as we can, meet that company’s management, and also talk to the companies’ customers and competitors. Lastly, we speak with government officials who are involved in regulating and monitoring the businesses in which we may invest. We are confident that many of the objectives toward modernization and liberalization will be accomplished in Georgia, and that confidence has driven our search for investment opportunities in this country. Our first investment has been in the country’s largest bank, which has more than 30% of the country’s banking loans. It has a full range of services including insurance, leasing, credit cards, in addition to regular lending with over 866,000 retail clients and 68,000 corporate clients through its network of about 150 branches and more than 400 ATMs. The management is young and has embraced very advanced technologically with internet, mobile banking and other innovations. My team and I greatly enjoyed our visit, and hope to be back soon as our search for undiscovered gems in Georgia continues. F R AN K LI N TEM PLETON I NVES TM EN TS TEMPLETON EMERGING MARKETS OVERVIEW 4 Important Information This document is for information only and does not constitute investment advice or a recommendation and was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. Any research and analysis contained in this presentation has been procured by Franklin Templeton Investments for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. Any views expressed are the views of the fund manager and do not constitute investment advice. The underlying assumptions and these views are subject to change. Franklin Templeton Investments accepts no liability whatsoever for any direct or indirect consequential loss arising from the use of this commentary or any information, opinion or estimate herein. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets is not necessarily indicative of the future or likely performance. Franklin Templeton Investments have 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. Given the rapidly changing market environment, Franklin Templeton Investments disclaim responsibility for updating this material. All MSCI data is provided “as is.” The portfolio described herein is not sponsored or endorsed by MSCI. In no event shall MSCI, its affiliates or any MSCI data provider have any liability of any kind in connection with the MSCI data or the portfolio described herein. Copying or redistributing the MSCI data is strictly prohibited. Issued by Templeton Asset Management Ltd. Registration No. (UEN) 199205211E Copyright© 2013 Franklin Templeton Investments. All rights reserved. Emerging and developed markets are represented by the MSCI Emerging Markets and MSCI World gross indices, respectively. Comparison made in US Dollar terms. Individual countries’ returns are represented by respective MSCI Individual Country gross return index in US Dollar terms.