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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
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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
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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
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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.