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FondsKongress Presentation
The Outlook for Global Emerging Market Equities
1st February 2006
Schroder Investment Management Limited
31 Gresham Street, London, EC2V 7QA
Telephone: 020 7658 6000
Fax: 020 7658 6965
Authorised and regulated by the Financial Services Authority
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Emerging Markets Efficient Frontiers vs Europe
10 year (Annualised)*
5 year (Annualised)*
3 year (Annualised)*
Annualised return (%p.a.)
7.5%
Annualised return (%p.a.)
Annualised return (%p.a.)
18%
36.0%
MSCI Europe 100%
7.0%
6.5%
6.0%
5.5%
EM 20%
EM 40%
MSCI EM 100%
16%
EM 80%
14%
12%
EM 60%
10%
8%
EM 80%
5.0%
6%
26.0%
EM 40%
0%
4.0%
16.0% 17.0% 18.0% 19.0% 20.0% 21.0% 15.5%
Annualised Risk (%SD pa)
Cumulative Return
MSCI EM +54.1%
MSCI Europe +100.2%
EM 80%
EM 60%
28.0%
EM 40%
24.0%
22.0%
EM 20%
2%
MSCI EM 100%
32.0%
30.0%
EM 60%
4%
4.5%
MSCI EM 100%
34.0%
20.0%
EM 20%
MSCI Europe 100%
MSCI Europe 100% 18.0%
16.5% 17.5% 18.5% 19.5%
Annualised Risk (%SD pa)
12.5% 13.5% 14.5% 15.5% 16.5%
Annualised Risk (%SD pa)
Cumulative Return
MSCI EM +111.7%
MSCI Europe +6.5%
Cumulative Return
MSCI EM +141.9%
MSCI Europe +69.2%
Emerging markets are excellent diversifiers
Source: Factset, MSCI. *All figures are US$ MSCI Price returns to 30 December 2005
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Economics
Cyclical recovery
Relative Performance of MSCI EM/World and OECD G7 Lead Indicator
yoy % change
yoy % change
8
60
6
40
4
20
2
0
0
-20
-2
-4
-40
-6
-60
Dec-90
Jun-93
Dec-95
OECD G7 Lead Indicator
Jun-98
Dec-00
Jun-03
Dec-05
MSCI EM / MSCI World Free (rhs)
Cyclical upturn supportive for gems
Source: Thomson DataStream, data shown to December 2005
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Global Economic Outlook for 2006
Country
2005
Scenario 1
Base Case
(60% probability)
Global Growth
CPI
Interest Rates
EM Performance
3.2%
2.9%
2.8%
+35%
2.9%
2.1%
3.2%*
+10% to +15%
Scenario 2
Growth
Resurgence
(30% probability)
3.7%
2.8%
4.0%
+20%
Scenario 3
Ice Age
(10% probability)
2.1%
1.5%
2.3%
0% to -10%
*Fed fund rates to peak at 4.75% Q1 2006
Source: Schroders
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Economics
Outlook remains positive
World GDP Growth
2004
Consensus %
2005
Consensus %
2006
Consensus %
World
+3.8
+3.2
+3.2
US
Japan
European Union
+4.2
+2.3
+2.3
+3.6
+2.4
+1.6
+3.4
+2.0
+2.1
Latin America
North East Asia
South East Asia
Eastern Europe
+5.8
+7.9
+6.3
+7.2
+4.2
+7.2
+5.0
+5.3
+3.9
+6.9
+5.0
+5.3
Source: Consensus Economics December 2005
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Economics
Emerging Market economies decoupling
Difference in real GDP Growth (Emerging vs Developed) and
Relative Performance Differential (MSCI EM vs MSCI World)
6.0 Mar 1989 = 100
5.0
4.0
3.0
2.0
1.0
0.0
-1.0
-2.0
-3.0
-4.0
300
270
240
210
180
150
120
90
60
30
Global GDP represented
by Emerging Markets (%)
2005
2004
2003
2000
26.0*
25.9
24.9
24.2
*CLSA estimate
Source: CLSA
Mar-89 Mar-92 Mar-95 Mar-98 Mar-01 Mar-04
Real GDP growth differential (LHS)
Relative performance MSCI EM vs
MSCI World (rhs)
Source: CSFB, data shown to December 2005
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Economics
Emerging Market* Exports
Share in Emerging Market* Exports
%
24
20
16
12
8
4
1996
2000
1998
U.S.**
2004
2002
China **
2006
China now accounts for almost same share of emerging economies’ exports as the
US
Source: BCA Research December 2005
* Includes Brazil, Chile, Turkey, Taiwan, Korea, Thailand, Singapore, Malaysia, Indonesia, The Philippines and India
** Smoothed except for final data points
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Economics
Decoupling… continues
Economic Forecast
2011 – 2015 (Average)
G7
NorthEast Asia
SouthEast Asia
Eastern Europe
Latin America
GDP
Growth
Industrial
Production
Current
Account
(% of GDP)
CPI
+2.4
+6.5
+5.2
+5.0
+3.8
+2.5
+10.8
+6.9
+5.8
+4.3
-0.9
+1.2
+5.1
-0.5
-0.8
+2.0
+2.9
+3.4
+4.0
+4.4
Source: Consensus Economics October 2005
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Economics
GEM Industrial Production Outperforming G7 Industrial Production
Industrial Production
145
135
125
115
105
95
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05
G7 Industrial Production
GEM Industrial Production*
Source: Thomson Datastream, EIU, Factsheet, ML GEM Equity Research, August 2005
* Weighted by MSCI, includes: Brazil, Mexico, Korea, Taiwan, China, India, Turkey and South Africa. Data rebased to 1/2000
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Economics
Structural improvement
Change in leading emerging market parameters end 1994 - 2005
Area
Debt/GDP
EMBI+ Sovereign rating
Inflation
Fiscal balance
Current account balance
Gross external financing requirement as % of GDP
GDP growth
Exports to GDP
Average 3 month volatility
1994
43.0%
BB56%
-3.1%
-2.1%
4.2%
6.7%
19.0%
8%
2005
2005 minus
1994
43.1%
BB+
4%
-1.0%
1.8%
5.7%
4.7%
34.2%
10.4%
0.1%
2 points
-52%
2.1%
3.9%
1.5%
-2.0%
15.2%
2.4%
Source: Deutsche Bank January 2006
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Emerging Markets
Some structural shifts
Emerging markets*:
Foreign reserves
28
% of GDP
26
Foreign debt
Trade balance
% of GDP
% of GDP
36
Record high
34
24
22
3.5
A sharp
decline
2.5
32
1.5
20
30
18
A dramatic
turnaround
0.5
28
16
14
-0.5
26
12
10
-1.5
24
94
96
98
00
02
Foreign reserves
04
06
94
96
98
00
02
Foreign debt
04
06
94
96
98
00
02
04
06
Trade Balance
*Includes 20 Emerging Market economies
Source: BCA Research December 2005
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Economics
Structural Improvement
Inflation well and truly
beaten
...Exchange rates
undervalued, not
overvalued
600
110
%
… Current accounts now
in surplus
4 % GDP
Jan 90 =100
105
500
3
100
400
2
95
300
1
90
200
0
85
100
0
Jan92
Oct94
Jul97
Apr- Feb- Nov00
03
05
GDP weighted-average Emerging
Market inflation rates
Source: JP Morgan, data shown to November 2005
80
-1
75
-2
90
93
96
99
02
05
Real effective exchange rate (median)
Source: JP Morgan, data shown to December 2005
96 97 98 99 00 01 02 03 04 05e
Emerging Markets current account %
GDP
Source: JP Morgan, data shown to December 2005
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GEM and Developed Markets
Key macroeconomic data
Country
EM
US
Japan
Europe
Developed Markets
EM minus Developed Markets
CPI
(%)
CA Bal
(% of GDP)
Fiscal Bal
(% of GDP)
Total Govt
Debt (%
GDP)
06 (%)
05 (%)
06 (%)
05 (%)
06 (%)
05 (%)
4.2
3.0
0.5
1.9
2.3
1.9
2.1
-6.4
3.3
0.0
-3.2
5.3
1.3
-6.8
3.3
0.3
-3.3
4.6
-1.7
-2.7
-5.7
-2.8
-3.1
1.4
-1.9
-3.3
-5.0
-2.8
-3.3
1.4
44.4
65.7
174.3
70.0
79.9
35.5
Source: Deutsche Bank, MSCI, Bloomberg. Data shown at 16 November 2005
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Economics
Structural improvements have led to improved credit rating
Market Cap Weighted GEM Credit Rating
2
BBB+
BBB
BBB0
Dec-97
Dec-99
Dec-01
Dec-03
Dec-05
Source: UBS December 2005
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Risk
As economies have improved, volatility has declined
MSCI EM Historical volatility
50%
40%
30%
20%
10%
0%
Dec-93
May-96
Oct-98
Mar-01
Aug-03
Dec-05
MSCI EM 10 week volatility
Source: Bloomberg, data shown to December 2005
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Risk:
… Resulting in excellent Sharpe ratios
5 year market performance
GEMS
S&P
500
Russell
2000
Nasdaq
ACWI
EAFE
DAX
Nikkei
5 Years: Volatility (%)
18.4%
16.5%
19.8%
25.8%
15.1%
15.6%
24.8%
22.7%
$(%) Return
22.6%
-1.1%
6.8%
-2.2%
0.6%
2.4%
1.1%
2.6%
Sharpe Ratio
1.22
-0.07
0.35
-0.09
0.04
0.15
0.05
0.11
Source: Deutsche Bank GEMs Strategy, Bloomberg, MSCI, data shown for 30 December 2005
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Relative price still well below 1994 highs
MSCI EM Relative to MSCI World
US$
400
360
320
280
240
200
160
120
80
40
Dec 1988 = 100
Dec-88
31 December 1998 to 30
December 2005
MSCI World
MSCI EM
24.3%
180.6%
Source: Factset, MSCI. MSCI Gross indices quoted
May-92
Oct-95
Feb-99
Jul-02
Dec-05
MSCI EM relative to MSCI World
Source: Thomson DataStream, data shown to December 2005
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Valuations
P/E ratio also at low historic levels
MSCI EM Price Earnings Ratio*
45
40
35
30
25
20
15
10
Dec-91
Apr-94
Aug-96 Dec-98
Apr-01
Aug-03
Dec-05
MSCI EM P/E
* P/E ratio shown is MSCI EM from 30 September 1995. Prior to 30 September 1995 IFCI P/E ratio is shown
Source: Factset, Thomson DataStream, data shown to December 2005
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Valuations
… Forward P/E also at low historic levels
Forward Price Earnings
US$
25
20
P/E
EPS
PE/G
15
10
Emerging
Markets
USA
World
10.8
14.3
0.8
15.3
13.9
1.1
14.8
12.2
1.2
Source: Factset, MSCI
As at December 2005, IBES – 12 month forward
5
0
Jun-94
Oct-96
Feb-99
May-01
Sep-03
Dec-05
MSCI EM Forward P/E
Source: Factset, MSCI, data shown to December 2005
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Valuations
Cheap relative to developed markets
Price Earnings Discount
%
30%
20%
10%
0%
-10%
-20%
-30%
-40%
-50%
-60%
-70%
Emerging Markets at a Premium
Emerging Markets at a Discount
Jan-92 May-94 Sep-96 Jan-99 May-01 Aug-03 Dec-05
MSCI EM relative to MSCI World Forward P/E
Source: Thomson Datastream, data shown to December 2005
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Valuations
Cheap relative to developed markets
Price Earnings / Growth Ratio*
%
0%
-10%
-20%
-30%
-40%
-50%
-60%
-70%
-80%
93
96
98
MSCI EM vs MSCI US
01
03
05
MSCI EM vs MSCI World
* 12m rolling average of I/B/E/S 12m Forward P/E to Long Term
average EPS growth (3–5 years)
Source: Factset data shown to December 2005
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Valuations
Cheap relative to other asset classes
Yields from different asset classes
Yield %
10
9
8
7
6
5
4
3
2
1
0
EM
Equities
US
Japanese US AAA
US
EM
EMU
UK
US High
Yield Equities** Equities** Sovereign Equities** Equities* Bonds** Treasurys
Bonds
Bonds**
* Forward Earnings Yield for Equities
** Corporate Bond
Source: BCA Research December 2005
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Valuations
Underpinned by improving ROE
MSCI EM ROE relative to MSCI World ROE
2.5
2.0
1.5
1.0
0.5
0.0
Jan-92 May-94 Aug-96 Dec-98
Apr-01
Aug-03 Dec-05
MSCI EM ROE / MSCI World ROE
Source: CSFB, data shown to December 2005
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Valuations
Reasonably priced relative to size of economies
GEM Aggregate Index / GDP
%
300
250
200
+1Std
Avg
150
100
-1Std
50
0
Jan-88
Aug-91
Mar-95
Oct-98
May-02
Dec-05
GEM Aggregate Index/GDP
Source: UBS, data shown to December 2005
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Liquidity
Fund flow was supportive during second half of 2005
Monthly change in flows for Emerging Market dedicated funds
US$m
3000
2000
1000
0
-1000
-2000
-3000
Jan-95
Jan-97
Jan-99
Jan-01
Jan-03
Jan-05
Volatile flows have not affected performance
Source: EmergingPortfolio.com, data based on 352 dedicated GEM
funds and is shown to November 2005
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Foreign Fund Flows into Emerging Markets
Global US$m
Emerging Markets
Equity New Inflows
1998
1999
2000
2001
2002
2003
2004
YTD 30/11/05
2,228.5
3,563.6
-164.4
-350.8
-868.6
5,896.2
-2,268.3
2,265.3
Source: EmergingPortfolio.com, data based on 352 dedicated GEM
funds and is shown to November 2005
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Concerns
– $ weakness
– Rising interest rates
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Concerns
A weak Dollar has been positive for Emerging Markets
Monthly change in flows for Emerging Market dedicated funds
Inverted Scale US$m
80
35
85
30
90
25
95
20
100
15
105
10
110
5
115
0
Dec-90 Jun-93 Dec-95 Jun-98 Dec-00 Jun-03 Dec-05
Trade-weighted US$
MSCI Emerging Markets relative to MSCI World in local
currency (rhs)
Source: Thomson Datastream, data shown to December 2005
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Concerns
Interest rate cycles have been associated with financial crises
%
%
16
Mexican
Peso Crisis
1987 Crash
14
S&L Crisis
Tech Bubble Burst
Asian Crisis
12
Do we need
another crisis
for Fed
Tightening
to stop?
10
8
LCD Crisis
6
Continental III
4
First Penn
2
76
81
86
91
96
20
18
16
14
12
10
8
6
4
2
0
Bubbles?
– High yield
– EM Debt
– Real Estate
01
10-Year treasury yield (LS)
Fed funds target rate (RS)
Source: BCA Research December 2005
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Concerns
Emerging Markets tend to falter when US rates peak
110
105
100
95
90
85
-12 -10 -8 -6 -4 -2
Mean, EM rel. to the US
0
2 4 6 8 10 12
Median Perf, EM rel to US
Emerging Markets Perf. Rel to US peaks 2 to 3 months before
US Rate Hike Cycle Peaks
Source: Citigroup Investment Research, Datastream, MSCI, Worldscope and IBES
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5 year correlation of key factors to GEM
0.9
0.6
0.38
0.48
0.5
0.53
OECD
Leading
Indicator
Copper
0.3
0.02
-0
-0.3
-0.6
-0.9
-0.73
-0.67
EMBI+
VIX
Global
M2
Local
US 10Yr
Currency
Yield
GEMs are positively correlated with rising US 10 year yields
Source: Deutsche Bank, MSCI, Bloomberg. Data shown for October 2005
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Summary
Economics
– Global slowdown, but modest
– Emerging Market economies have been decoupling
– Emerging Market economies have gone through structural
improvement
Valuations
– Remain attractive
Concerns
– $ weakness supportive, provided not excessive
– Over zealous monetary tightening
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Global Emerging Markets Strategy
Source: Schroders, 6th January 2006
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The Case for BRIC
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World Population
2003
Population
(2003, millions)
Rest of
World
57%
BRICS
43%
Brazil
Russia
India
China
176.6
143.4
1,064.4
1,288.4
OECD
World
914.6
6,272.5
BRICs nearly 3 times the population size of the OECD
Source: World Bank, World Development Indicators Database April 2005
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Emerging Markets stages of development
Maturity
Hong Kong/Singapore
Taiwan
Israel
S. Korea
G7
Czech/Hungary/Poland
Mexico
Malaysia
Sub-Saharan
Africa
Brazil
China Russia
India
Frontier markets
Emerging markets
deregulation
Premium growth (5%-7%)
Established growth
(3%-5%)
Mature economies
(2%-3%)
Time
BRICs at early stage of development …… therefore should grow faster
Source: World Bank, World Development Indicators Database April 2005
GNI/capita 2003 data
Schroders
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GDP
2003*
2040**
BRICS
8%
GNI per capita*
2003 (US$)
Rest of
World
92%
Rest of
World
60%
BRICS
40%
Brazil
Russia
India
China
USA
2,720
2,610
540
1,100
37,870
OECD
World
29,360
5,510
BRICs small but growing percentage of World GDP
Source: * World Bank, World Development Indicators Database April 2005
** Goldman Sachs
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Global Growth Split
2005E
2040
BRICS
31%
Rest of
World
33%
Rest of
World
69%
BRICS
67%
BRICs to be 67% of global growth by 2040
GS BRICs Model Projections
Source: Goldman Sachs, ‘How solid are the BRICs ’
Global Economics Paper No:134 (Dec 2005)
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GDP
The largest economies in 2050
China-India (Chindia) . . . the
second-largest economy in 2004 on
PPP basis
GDP (2005 US$bn)
Proportional world GDP (PPP)
50000
45000
40000
UK
3.1
France
3.1
35000
30000
Germany
4.4
25000
Japan
20000
15000
7.3
Chindia
10000
5000
20.6
US
21.3
0
Ch
US
In
Jpn
Br Mex Russ Ger UK
Fr
0
5
10
15
20
25
%
Source: GS BRICs Model Projections
–
–
–
Source: World Bank
Per OECD China is already bigger than 2 of G7 – Canada and Italy
By 2010 China will be 4th largest economy after US, Japan and Germany
“If China were cut off from foreign trade and investment its growth would be just 1-2% p.a. less.”
Source: Professor Lucas, University of Chicago – Sunday Times 25th September 2005
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BRICs growth of middle class
Number of people above $3,000 in the BRICs
vs G6 population
Number, millions
2200.0
2000.0
1800.0
1600.0
1400.0
1200.0
1000.0
800.0
600.0
400.0
200.0
0.0
1882.7
1195.4
733.4
684.8
164.3
51.9
86.5
Brazil
China
2005
390.2
6.0
India
349.7
295.7
132.8
214.1
69.7
Russia
BRICs
G6
USA
2025
BRICs discretionary consumption will be key driver of global growth
GS BRICs Model Projections
Source: Goldman Sachs, Dreaming with BRICs: the Path to 2050 (Oct 2003)
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BRICs growth of middle class
Consumer durable growth*
Nuber, millions
2000
1800
1600
1400
1200
1000
800
200%
230%
140%
720%
770%
170%
510%
550%
600
400
200
0
Passenger cars
TV sets
BRICs 2005 est
BRICs 2025 forecast 70% penetration
PCs
Mobile phones
BRICs 2025 forecast 50% penetration
…driving strong consumer growth
*Schroders estimation using 50% and 70% of current developed market penetration rates. Assuming world
population growth from 6.3bn to 7.6bn between 2003 and 2005
Source: Population forecasts - Goldman Sachs, Dreaming with BRICs: the Path to 2050 (Oct 2003),
Penetration rates- HSBC Earthtrends, Schroders
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Currency
Purchasing power parity* (against US$)
China
India
Russia
Brazil
-50.0 -45.0 -40.0 -35.0 -30.0 -25.0 -20.0 -15.0 -10.0
-5.0
0.0
% Undervalued
BRICs currencies are undervalued on a PPP basis…
PPP based on inflation differentials (not trade weighted)
•Source: Bloomberg, Schroders. All data to Dec 2005 (based from Jan 2002)
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BRICs Efficient Frontiers
BRICs vs MSCI China 5 year
(Annualised)*
BRICs vs MSCI India 5 year
(Annualised)*
Annualised return (%pa)
Annualised return (%pa)
22%
20.5%
BRICS 100%
17%
20.0%
BRICS 80%
19.5%
BRICS 60%
12%
19.0%
BRICS 40%
BRICS 20%
BRICS 100%
BRICS 80%
BRICS 60%
BRICS 40%
BRICS 20%
18.5%
7%
18.0%
2%
23%
MSCI China 100%
24%
25%
26%
27%
28%
Annualised return (%SD pa)
17.5%
23%
MSCI India 100%
24%
25%
26%
27%
Annualised return (%SD pa)
BRICs give higher returns and lower risk than single country portfolios
Source: Factset, Bloomberg, Schroders
* all returns to 31 Dec 2005
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Precedent of Korea
KOSPI Price Index
1200
1000
800
1975 to 1986
1987 to 1994
600
GNI/capita
US$
KOSPI
growth %
$602 to $2,643
$2,643 to $9,459
150%
438%
400
GNI/capita 2003
US$
200
0
75
80
85
90
95
00
Korea SE Composite (KOSPI) - Price
Index (~KW)
Source: Korean National Statistical Office
05
Brazil
Russia
India
China
$2,720
$2,610
$540
$1,100
Source: World Bank, World Development
Indicators Database April 2005
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Precedent of Taiwan
TAIEX Index
12,000
10,000
8,000
1979 to 1983
1984 to 1992
6,000
GNI/capita
US$
TAIEX
growth %
$758 to $2,573
$2,573 to $9,591
40%
343%
4,000
GNI/capita 2003
US$
2,000
0
79
83
87
91
TAIEX Index
Source: Directorate – General of Budget
Accounting & Statistics Taiwan, Bloomberg
95
99
03
Brazil
Russia
India
China
$2,720
$2,610
$540
$1,100
Source: World Bank, World Development
Indicators Database April 2005
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Country Allocation
BRICs
*Index levels calculated internally intra-month
Source: Schroders, 6th January 2006
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Disclosure Statement
The returns presented represent past performance and are not necessarily representative of future returns which may vary. The value
of investments can fall as well as rise as a result of market or currency movements
Potential investors should be aware that investment in Emerging Markets involves an above average degree of risk and should be seen
as long-term in nature. Less developed markets are generally less well regulated than mature markets, they may be less liquid and
may have less reliable custody arrangements
Opinions
Schroders has expressed its own views and opinions in this presentation and these may change
Data Protection
For the purposes of the United Kingdom’s Data Protection Act 1998, the data controller in respect of any personal data you supply is
Schroder Investment Management Limited. Personal information you supply may be processed for the purposes of investment
administration by the Schroders Group which may include the transfer of data outside of the European Economic Area. Schroder
Investment Management Limited may also use such information for marketing activities unless you notify it otherwise in writing
Taped Telephone Lines
For your security communications with our London office may be taped or monitored
Identification
Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA
Telephone: 020 7658 6000, Fax: 020 7658 6965
Authorised and regulated by the Financial Services Authority
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