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Accessing Listed Emerging Markets – Key drivers of Emerging Market Stock Returns Christopher Laine, Senior Portfolio Manager State Street Global Advisors Point 1: Don’t Listen to Your Economists (that often) Economic Growth is a Necessary, but Insufficient Condition for Positive Equity Returns Key Drivers of Emerging Market Stock Returns China vs. Mexico: A Stylised Example China’s Growth has Exceeded Mexico by 7.6% p.a. for Twenty Years 15 600 20-Year Avg. Chinese GDP Growth: 10.3% p.a. 20-Year Avg. Mexican GDP Growth: 2.7% p.a. 500 10 % 5 400 0 200 -5 100 -10 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 300 China Source: MSCI, SSgA, IMF 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20 But Did Shareholders Benefit….? Mexico Key Drivers of Emerging Market Stock Returns Growth is Only Important if it Translates into Improving Return on Equity $2.5 $2.0 $1.5 P/B Multiple $1.0 ROE ex Dividends Dividends $0.5 FX $0.0 -$0.5 Source: MSCI, SSgA 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 -$1.0 Key Drivers of Emerging Market Stock Returns Back To China vs. Mexico From 1997-2003, Returns were Below the Cost of Capital for China 25 20 15 China 10 Mexico 5 China: “We issue Equity because it is cheaper than Debt.” Source: MSCI, SSgA 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 0 Point 2: Don’t Forget About the Small Guys: There is A Nice Liquidity Premia to Collect Key Drivers of Emerging Market Stock Returns David Trumps Goliath (Again): Small Countries Outperform in Emerging Markets Small is Beautiful or The Anti-BRIC Strategy Annualised Returns (Since Inception)* Annualised Standard Deviation (Since Inception)* Large 5.22 25.52 Mid 4.40 26.16 Mid-Small 11.20 24.08 Small 15.59 22.08 14 12 Smallest Countries Small/Mid Mid/Large Large 10 8 6 4 2 Jan-13 Jan-12 Jan-11 Jan-10 Jan-09 Jan-08 Jan-07 Jan-06 Jan-05 Jan-04 Jan-03 Jan-02 Jan-01 Jan-00 Jan-99 Jan-98 0 * January 1998 to January 2013 Source: MSCI, SSgA. Point 3: Watch out For Unrewarded Risk Key Drivers of Emerging Market Stock Returns The Return to Beta is Not What You Would Expect Average Annualised Monthly Returns vs. Beta for Equal Weighted Portfolio (Emerging Market Universe) 1996-2013 Average Annualised monthly return (%) 15% 10% 5% 0% -5% -10% < 0.4 0.4 - 0.6 Past performance is not a guarantee of future returns. This information is for illustrative purposes only. Source: SSgA 0.6 - 0.8 0.8 - 1.0 1.0 - 1.2 Axioma-Beta 1.2 - 1.4 1.4 - 1.6 1.6 - 1.8 1.8 - 2 >2 State Street Global Advisors, Australia, Limited (ABN 42 003 914 225) (“SSgA Australia”) is the holder of an Australian Financial Services Licence (AFSL Number 238276). Registered office: Level 17, 420 George Street, Sydney, NSW 2000, Australia • Telephone: +612 9240-7600 • Facsimile: +612 9240-7611 • Web: www.ssga.com. The views expressed in this material are the views of Chris Laine through the period ended 24 March 2014 and are subject to change based on market and other conditions. All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information. This document contains certain statements that may be deemed to be forward-looking statements. All statements, other than historical facts, contained within this article that address activities, events or developments that SSgA expects, believes or anticipates will or may occur in the future are forward-looking statements. These statements are based on certain assumptions and analyses made by SSgA in light of its experience and perception of historical trends, current conditions, expected future developments and other factors it believes are appropriate in the circumstances, many of which are detailed herein. Such statements are subject to a number of assumptions, risks, uncertainties, many of which are beyond SSgA’s control. Readers are cautioned that any such statements are not guarantees of any future performance and that actual results or developments may differ materially from those projected in the forward-looking statements. Investing involves risk including the risk of loss of principal. Investing in foreign domiciled securities may involve risk of capital loss from unfavourable fluctuation in currency values, withholding taxes, from differences in generally accepted accounting principles or from economic or political instability in other nations. Investments in emerging or developing markets may be more volatile and less liquid than investing in developed markets and may involve exposure to economic structures that are generally less diverse and mature and to political systems which have less stability than those of more developed countries. This material is of a general nature only and does not constitute personal advice. It does not constitute investment advice and it should not be relied on as such. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. We encourage you to consult your tax or financial advisor. There is no representation or warranty as to the current accuracy of, nor liability for, decisions based on such information. Past performance is not a reliable guide of future results. This communication is directed at institutional and wholesale clients only. The products and services to which this communication relates are only available to such persons and persons of any other description (including retail clients) are not entitled to rely on this communication. The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSgA Australia’s express written consent. © 2014 State Street Corporation - All Rights Reserved Exp. Date: 30/06/14 AUSMKT-1057