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Driving Global Growth: Opportunities in Growth Markets January 2013 Kathryn Koch Goldman Sachs Asset Management Question: True or false, the World can grow faster over the next 10 years than it has over the last 10 years? 100% A. True B. False 0% A. B. 2 Goldman Sachs Asset Management Executive Summary We believe: Growth Markets will be the key drivers of global growth. Direct investment in both fixed income and equity markets is critical. Valuations are attractive. This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. Please see additional disclosures. For illustrative purposes only, and subject to change. 3 Goldman Sachs Asset Management Redefining Emerging Markets Goldman Sachs Asset Management Redefining Emerging Markets: An introduction to Growth Markets ~200 countries in the world1 Developed Markets2 Growth Markets Emerging Markets High average income per capita Current global GDP share ≥ 1% Current global GDP share < 1% Advanced economic development Favorable demographics and rising productivity Generally low GDP and income per capita, but rapidly increasing in some Adequate market size and depth Scope for improvement Open and transparent markets 33 countries2 For example: US, Japan, Germany, UK and other G7 countries 8 countries 160+ countries For example: For example: For example: BRICs (Brazil, Russia, India & China) South Korea, Mexico, Indonesia and Turkey Nigeria, Vietnam, Philippines, Iran, Egypt, Pakistan and Bangladesh Source: GSAM, “It is Time to Re-define Emerging Markets”, 31-Jan-11. 1 Source: CIA World Factbook, as of 31-Mar-12. 2 Consistent with the IMF’s definition of advanced economies, ex Korea. World Economic Outlook, Sept-12. N-11 5 Goldman Sachs Asset Management We believe the Growth Markets will be 8 out of the top 10 contributors to global growth over the next decade Contribution to Global GDP (2011-2020)1 60% 50% 40% 30% 20% 10% Iran Japan Turkey UK Korea Indonesia Mexico Brazil Euro zone Russia India US N-11 G7 China BRICs Growth Markets 0% Source: Global ECS Research, Global Economics Paper 208, “The BRICs 10 Years On: Halfway Through The Great Transformation”, as at 7-Dec-11. This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. Please see additional disclosures.. 1 6 Goldman Sachs Asset Management Question: What will be the largest growth driver in China over the next decade? 88% A. Infrastructure spending B. Consumption C. Exports 9% A. 3% B. C. 8 Goldman Sachs Asset Management The Growth Markets have favourable demographics Median age and population under 25 years old1 Breakdown of World population (billions)1 40 Median age 1.6 37 # of people <25 yrs old 1.4 35 1.4 Growth Markets 3.4bn 49% 1.2 25 1.0 People (billions) Rest of World 2.8bn 39% Years 30 30 20 15 Other N-11 0.8bn 12% 10 5 0.8 0.6 0.4 0.2 0 0.1 0.0 Growth Markets US Growth Markets US 1 Source: UN Population Statistics, as of 2012. This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. Please see additional disclosures. 9 Goldman Sachs Asset Management Growth Markets have the essential growth conditions in place The Growth Environment Score The Growth Environment Score (GES)1 is calculated every year by Goldman Sachs for over 180 countries. It monitors productivity and sustainability of growth. Scores range from 0-10 (where 0 is the worst and 10 is the best). Macroeconomic stability Government deficit External debt Inflation Macroeconomic conditions Investment rates Openness of the economy Political conditions Corruption indices Rule of law Political stability Technological capabilities Human capital Life expectancy Educational levels Phone penetration Personal computer penetration Internet penetration Microeconomic Environment Cost to start a business Urban population Patent applications Expenditures on R&D Source: Goldman Sachs Global ECS Research Global Economics Paper 211, “Our 2011 GES:A Sharper Signal for Growth”, as at 21-Mar-12. The Growth Environment Scores (GES) are designed as a simple representation of the conditions necessary for convergence (i.e. catch-up growth) to occur. For an equivalent GES, less developed countries should grow faster. Some simple regressions of growth on income per capita and the index suggest that one point on the index adds about 0.6% to a country’s growth rate, and there is also evidence that it increases the convergence speed significantly. (Definition source: GS Global Economics Paper No:134 “How Solid are the BRICs? - Appendix 2: Measuring Conditions: How the GES is Compiled”, as at 1-Dec-05). This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. Please see additional disclosures. 1 10 Goldman Sachs Asset Management Growth Markets have the essential growth conditions in place 2011 Growth Environment Score 8 1997 - 2011 GES Change 7 1997 GES 6 2011 Developing Average 5 4 3 2 1 Growth markets Nigeria Pakistan Banglade sh Egypt Philippin es Iran Vietnam India Indonesi a Turkey Russia Mexico Brazil China South Korea 0 Other N-11 countries Source: Goldman Sachs Global ECS Research Global Economics Paper 211, “Our 2011 GES:A Sharper Signal for Growth”, as at 21-Mar-12. The Growth Environment Scores (GES) are designed as a simple representation of the conditions necessary for convergence (i.e. catch-up growth) to occur. For an equivalent GES, less developed countries should grow faster. Some simple regressions of growth on income per capita and the index suggest that one point on the index adds about 0.6% to a country’s growth rate, and there is also evidence that it increases the convergence speed significantly. (Definition source: GS Global Economics Paper No:134 “How Solid are the BRICs? - Appendix 2: Measuring Conditions: How the GES is Compiled”, as at 1-Dec-05). This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. Please see additional disclosures. 1 11 Goldman Sachs Asset Management Why increase your Growth and Emerging Markets allocation? Emerging Markets Exposure (% of total) Most investors are underweight emerging markets today 40% 38% 35% 30% 25% 20% 20% 13-17% 15% 10% 0-6% 5% 0% Institutional Investors Ave Allocation to EMD and EME¹ Portfolio Construction Services (PCS) Optimized EM Allocation² EMD and EME % of total Global Market Cap³ Emerging Markets % of Global GDP⁴ Source: 1 Investing in the Growth Market World - Strategy Series from the Office of the Chairman 12/2011. 2 GSAM’s Global Portfolio Solutions group optimized allocations: 13% EME and EMD as a % of total portfolio allocation, 16% EMD of total fixed income allocation or 17% EME of total equity allocation as of 4/2012. 3 Towards an Alternative Fixed Income Benchmark - Monthly Insights from the Office of the Chairman 4/2012. 4 IMF 3/2012. 12 Goldman Sachs Asset Management Investment Implications: Growth and Emerging Market Equity Goldman Sachs Asset Management Growth and Emerging Market equity continues to evolve 18 Total market capitalization (LHS, USD trillions) 18000 16 Number of listed companies (RHS, thousands) 16000 14 14000 12 12000 10 10000 8 8000 6 6000 4 4000 2 0 2000 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Capital market deepening has been driven by: New equity issuance provides opportunity to invest in small and mid cap companies Exponential growth in market capitalization can lead to improvements in market liquidity and depth Improving corporate governance provides transparency and accountability to investors Data as of 12/31/11. Source for total EM market cap: World Bank (based on MSCI EM index country membership 21 countries). Source for number of companies: World Federation of Exchanges. This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. Please see additional disclosures. 14 Goldman Sachs Asset Management BRICs + N-11 could comprise a much larger proportion of global market capitalisation Composition of World Equity Market Cap1 2010 2020 BRICs + N-11 23% Developed Markets (ex US) 37% Developed Markets (ex US) 29% 2030 BRICs + N-11 36% Developed Markets (ex US) 22% BRICs + N-11 46% Other EM 8% US 32% US 27% US 23% Other EM 8% Other EM 9% Total World Equity Market Cap = US$43 trillion Total World Equity Market Cap = US$83 trillion Total World Equity Market Cap = US$145 trillion Source: “Global Economics Paper No: 204”, GS Global ECS Research. 8-Sep-10. This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. Please see additional disclosures.. 1 15 Goldman Sachs Asset Management BRIC and N-11 equity markets have delivered superior riskadjusted returns over time Last 10 years annualized returns (1-Apr-02 to 31-Mar-12) Last 10 years Sharpe ratio (1-Apr-02 to 31-Mar-12) 18% 0.60 16% 0.57 15.9% 14.5% 0.50 14% 0.43 11.5% 12% 0.38 0.40 10% 0.30 8% 6.5% 0.20 6% 0.20 4% 2.7% 0.10 2% 0.02 0% 0.00 N-11 GDP Proxy Index * MSCI BRIC Index ** MSCI MSCI Frontier MSCI World Emerging Markets Index Index ** Markets Index (since ** inception) *** N-11 GDP Proxy Index * MSCI BRIC Index ** MSCI MSCI Frontier MSCI World Emerging Markets Index Index ** Markets Index (since ** inception) *** * Simulated GDP weighted index return calculated by weighting local country indices from Bloomberg with annual GDP from International Monetary Fund, World Economic Outlook Database, 30-Apr-11. Excludes Iran. PLEASE NOTE THAT THESE RETURNS HAVE BEEN CALCULATED BY GSAM AND ARE NOT OFFICIAL INDEX RETURNS. THE RETURN SERIES IS SIMULATED AND MAY DIFFER, PERHAPS SUBSTANTIALLY, FROM ANY RETURN SERIES THAT MAY BE PUBLISHED BY AN INDEX PROVIDER. SIMILARLY, THE METHODOLOGY USED TO CALCULATE THESE RETURNS MAY DIFFER FROM THAT USED BY AN INDEX PROVIDER. Simulated performance is hypothetical and may not take into account material economic and market factors that would impact the adviser’s decision-making. Simulated results are achieved by retroactively applying a model with the benefit of hindsight. Actual results will vary. ** Source: Bloomberg. Price return indices through 31-Dec-11. *** MSCI Frontier Markets Index incepted on 31-May-02. annualized performance is shown since inception rather than for last 10 years. Source: Bloomberg. Price return indices through 31-Dec-11. Sharpe ratio calculated using 3 month USD Libor as the risk free rate. annualized return for 1-Jan-02 to 31-Dec-11 equal to 2.36%. For MSCI Frontier Markets Index, annualized return for 1-Jun-02 to 31Dec-11 equal to 2.37%. This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. Past performance is not indicative of future results, which may vary. 16 Goldman Sachs Asset Management Closing the gap: increasing EME allocation strategically Potential investment options to shape today’s equity portfolios for the future Existing EM Current Emerging Market Allocation BRICs N-11 Active Manager Approach 1 Keep your existing EM manager and add N11 countries to diversify with key emerging and growth markets Approach 2 Invest in the BRICs & N-11 countries as your diversified EM exposure to focus on the 15 fastest growing economies Approach 3 Keep your existing EM manager and add an active manager with low correlation of excess returns to potentially produce superior risk-adjusted equity portfolios than a single manager Non-EM This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. Please see additional disclosures. For illustrative purposes only, and subject to change. Legal and regulatory prohibitions exist with regard to investments in Iran. 17 Goldman Sachs Asset Management Sample Growth and Emerging Market Equity Allocations Approach 1 EM Index + N-11 Equity Fund (75:25) N-11, 25% EM, 75% Complements with exposure to the fastest growing emerging markets. Approach 2 BRIC + N-11 Equity Funds (70:30) N-11, 30% Approach 3 Multi-manager Implementation (50:50) EM Strategy A, 50% EM Strategy B, 50% BRIC, 70% Focuses on investing in the 15 most dynamic growth and emerging economies Combines active managers with low correlation of excess returns to produce superior riskadjusted equity portfolios There can be no assurance that the same or similar results can, or will be, achieved. This information is not intended to be used as a general guide to investing, or as a source of any specific investment recommendations, and makes no implied or express recommendations concerning the manner in which any client’s account should or would be handled, as appropriate investment strategies depend upon the client’s investment goals, guidelines, and restrictions. For illustrative purposes only and is not intended to market any GSAM product. 18 Goldman Sachs Asset Management Question: How many of these are consumed every day in Nigeria? 48% A. 5,000 B. 500,000 C. 5,000,000 D. 50,000,000 42% 9% 0% A. B. C. D. 20 Goldman Sachs Asset Management We believe current valuations provide an attractive cyclical entry point for a robust secular growth opportunity Forward Price-to-Earnings1 25 23 Forward price-to-earnings ratio 21 Developed Markets Growth and Emerging Markets Growth and Emerging Markets long term average 19 17 15 13 11 9 7 5 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 1 Source: GSAM, IBES, Datastream as at 23-Oct-12. Shown for MSCI EM Index. This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. Please see additional disclosures. 21 Goldman Sachs Asset Management Investment Implications: Growth and Emerging Market Debt Goldman Sachs Asset Management Question: Which is the safest investment? A. An Exxon Mobil corporate bond B. A US 10 year treasury note C. An Indonesian 10 year sovereign bond D. An Spanish 10 year sovereign bond 24 Goldman Sachs Asset Management Growth and Emerging market fundamentals show a broad picture of health Government Debt Fiscal Deficit Current Account Balance (% of GDP) (% of GDP) (% of GDP) 120 DM EM DM 108 0.8 0.0 100 EM 0.7 0.6 80 0.4 -1.0 60 0.2 -1.1 40 0.0 34 -2.0 -0.2 20 -0.4 0 -2.6 DM EM -0.6 -3.0 DM -0.5 EM Source: IMF and Haver, Data as at 01-Jan-2012 This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. Please see additional disclosures. 25 Goldman Sachs Asset Management Sovereign credit risk profile converging Canada France Germany Japan 2000 Today Hungary Netherlands Belgium Malaysia UK Italy Poland Mexico US Spain Thailand South Africa Brazil Turkey Russia AAA AA A BBB BB B CCC UK Belgium Malaysia Brazil Hungary Netherlands US Mexico Turkey Indonesia Germany Japan Poland Russia Canada France Thailand Italy South Africa Spain Indonesia Downgraded since 2000 Upgraded since 2000 Developed Market Growth and Emerging Markets For illustrative purposes only. Source: Bloomberg, S&P, GSAM. Countries rating reflected is foreign currency long term on Bloomberg. As of Aug 31, 2012. This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. Please see additional disclosures. Past performance does not guarantee future results, which may vary. 26 Goldman Sachs Asset Management Local Growth and Emerging Market rates remains attractive by several metrics Nominal yield differentials Real yield differentials 10.0 EM Local Bond Real Yield DM JPMNominal GBI Global Yield Index - YTM 5.0 9.0 8.0 4.0 Bond Yields (%) Bond Yields (%) Developed Bond Real Yield 6.0 JPMLocal GBI-EM GlobalYield Index - YTM EM Nominal 7.0 6.0 5.0 4.0 3.0 2.0 1.0 3.0 2.0 0.0 1.0 0.0 Source: Bloomberg, as of 31-Jul-12 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 -1.0 Source: Bloomberg, GSAM, as of 31-Jul-12 Local EM offers attractive real yields, whilst DM yields continue to hover at historically low levels. Source: JP Morgan, Bloomberg. This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. Past performance is not indicative of future results, which may vary. Please see additional disclosures. 27 Goldman Sachs Asset Management Diversification away from the USD Emerging market currencies have been appreciating, in line with economic growth, while the US dollar has been in a secular and steady decline for the past decade Growth of $100 300 EM Currencies* US Dollar* Ann. Return: +7.1% June 30, 2012: $232 250 US$ 200 150 Jan 1, 2000: $100 100 50 Ann. Return: -1.8% June 30, 2012: $80 0 Graph as of June 30, 2012. Source: Bloomberg, JP Morgan, Moody’s. Debt levels and fiscal data as of November 2011, Source: Moody’s * US Dollar is represented by the DXY index, a proxy for the general international value of the US dollar (average of the exchange rates between the US dollar and major world currencies). * EM Currencies is represented by the JPM ELMI+, an index of emerging market currencies, including Argentina, Brazil, Chile, China, Czech Republic, Egypt, Greece, Hong Kong, Hungary, India, Indonesia, Israel, Korea, Malaysia, Mexico, Philippines, Poland, Russia, Singapore, Slovak Republic, South Africa, Taiwan, Thailand, Turkey, and Venezuela. Past performance does not guarantee future results. 28 Goldman Sachs Asset Management Case study: Building a better global fixed income benchmark Barclays Global Sovereign Fiscal Strength index Market Value Indices Market capitalisationweighted bond indices provide an unbiased representation of the investable opportunity set They have served as a cornerstone for portfolio construction 1 GDP Weighting 2 Fundamental Tilts GDP-weighted indices moderate exposure to more highly indebted countries in DM A thorough screen aimed at capturing the financial soundness and strength of countries GDP weighted indices assign a higher weight to larger economies Level of indebtedness GDP weights are forward looking and reflect future opportunities Reliance on external funding & exposure to external shocks 3 Risk Weighted Tilt Adjusting the weights to account for the difference in volatility between countries Change in indebtedness & fiscal policy direction DM EM 9% Sharpe: 0.69 23% 24% Sharpe: 0.81 Sharpe: 0.82 25% Sharpe: 0.84 A better beta for fixed income portfolios Source: Barclays, IMF and GSAM calculations. Sharpe Ratios are calculated on the GSAM calculated index excluding China and India and are based on unhedged in USD returns. Sharpe Ratio are calculated over the period Jun-05 to Jun-12. This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. Please see additional disclosures. Data is based on latest GSAM assumptions and calculations. 29 Goldman Sachs Asset Management Executive Summary We believe: Growth Markets will be the key drivers of global growth. Direct investment in both fixed income and equity markets is critical. Valuations are attractive. This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. Please see additional disclosures. For illustrative purposes only, and subject to change. 30 Goldman Sachs Asset Management Would this topic be useful for future IIMC PMG programs? A. Absolutely 85% B. Yes, but not as a top priority as I can get this information elsewhere C. Yes, but only after other portfolio management topics are covered D. No, thank you 5% A. B. 10% 0% C. D. 32 Goldman Sachs Asset Management Did the speaker meet your expectations for this topic? A. Yes 100% B. No 0% A. B. 34 Goldman Sachs Asset Management Would you invite this speaker back for future IIMC programs? A. Yes 98% B. No 2% A. B. 36 Goldman Sachs Asset Management The information presented will impact my portfolio development / management processes A. Most definitely 59% B. It may or may not depending upon client circumstances C. No, I have already factored this information into my decisions 34% D. I do not expect these factors to influence my strategic portfolio development or management decisions 7% 0% A. B. C. D. 38 Goldman Sachs Asset Management Would you like more information on this topic? A. Webinar 41% B. Conference Call C. White Paper D. Any of the above 25% E. No, thank you 16% 13% 6% A. B. C. D. E. 40 Goldman Sachs Asset Management Appendix Goldman Sachs Asset Management Additional notes This material has been prepared by GSAM and is not a product of the Goldman Sachs Global Investment Research Division. The views and opinions expressed may differ from those of the Global Investment Research Division or other departments or divisions of Goldman Sachs and its affiliates. Investors are urged to consult with their financial advisors before buying or selling any securities. This information may not be current and GSAM has no obligation to provide any updates or changes. Opinions expressed are current opinions as of the date appearing in this material only. Confidentiality No part of this material may, without GSAM’s prior written consent, be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorized agent of the recipient. The MSCI Frontier Markets Indices provide broad representation of the equity opportunity set across 31 countries while taking investability requirements into consideration within each market. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The MSCI Emerging Markets Index consists of the following 21 emerging market country indices: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey. The MSCI BRIC Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the following four emerging market country indices: Brazil, Russia, India and China The Global Industry Classification Standard (GICS) was developed by and is the exclusive property and a service mark of Morgan Stanley Capital International Inc. (MSCI) and Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. (S&P) and is licensed for use by Goldman Sachs. Neither MSCI, S&P nor any other party involved in making or compiling the GICS or any GICS classifications makes any express or implied warranties or representations with respect to such standard or classification (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of such standard or classification. Without limiting any of the foregoing, in no event shall MSCI, S&P, any of their affiliates or any third party involved in making or compiling the GICS or any GICS classifications have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. 42 Goldman Sachs Asset Management Additional notes Economic and market forecasts presented herein reflect our judgment as of the date of this presentation and are subject to change without notice. These forecasts do not take into account the specific investment objectives, restrictions, tax and financial situation or other needs of any specific client. Actual data will vary and may not be reflected here. These forecasts are subject to high levels of uncertainty that may affect actual performance. Accordingly, these forecasts should be viewed as merely representative of a broad range of possible outcomes. These forecasts are estimated, based on assumptions, and are subject to significant revision and may change materially as economic and market conditions change. Goldman Sachs has no obligation to provide updates or changes to these forecasts. Case studies and examples are for illustrative purposes only. Past performance does not guarantee future results, which may vary. The value of investments and the income derived from investments will fluctuate and can go down as well as up. A loss of principal may occur. A summary prospectus, if available, or a Prospectus for the Fund containing more information may be obtained from your authorized dealer or from Goldman, Sachs & Co. by calling (retail - 1-800-526-7384) (institutional – 1-800-621-2550). Please consider a fund's objectives, risks, and charges and expenses, and read the summary prospectus, if available, and the Prospectus carefully before investing. The summary prospectus, if available, and the Prospectus contains this and other information about the Fund. Goldman, Sachs & Co. is the distributor of the Goldman Sachs Funds. © 2012 Goldman Sachs. All rights reserved. 43