Emerging Markets Outlook

7/30/2019 Emerging Markets Outlook

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Four Years After the Great Recession:The Outlook for Emerging Economies

and Equity Markets in 2013

November 2012

George R. Hoguet, CFA, FRM

CMINST-####

The information contained in this document is current as of the date presented unless otherwise noted.

This presentation is solely directed at qualified investors within the meaning of the FINMA circular 2008/8.


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Summary

After slowing in 2012, growth in emerging markets is expected to accelerate to 5.4% in

2013, more than four times the estimate for developed markets

The outlook varies significantly by region with Asia, led by China and India, expected to

grow 6.6% and Central Europe 2%

Monetary policy in emerging markets remains accommodative and emerging markets

retain policy flexibility. However, economic activity in emerging markets is closely linked

to global trade, commodity prices, and financial conditions. A disorderly default/financialcrisis in the Eurozone will inevitably impact emerging markets.

Risks to global economic activity remain to the downside, but QE3 and OMTs have

placed a support on asset prices

At roughly 10 times 12 month earnings current emerging market valuations are not

demanding. Assuming a ten year average forward p/e of 10.7 current valuations

anticipate a further 7% in 2013 EM earnings downgrades. Flows to emerging assets ofall kinds are likely to accelerate and investors should continue to reduce the home bias.


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Background

The emerging markets in the global economy

Transmission mechanisms of the Global Financial Crisis to emerging markets:

Trade

Commodities

Capital Flows

The policy response and its aftermath


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The BRICs in 2013

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Major policy initiatives in China to be implemented in 20142015

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Sharp acceleration in Brazil. 1.4% to 4.1% in 2013. The Central Bank has cut rates by 525

basis points since July 2011.

Russia: Mid-East tensions and secular growth in oil demand support 3.5% growth in 2013 2013 CPI forecasts: China 3.1%; India 6.9%; Russia 6.4%; Brazil 5.3%

Source: JP Morgan, Morgan Stanley, SSgA estimates


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India

6.3%

What is an Emerging Market? What an Index Provider Says it is!

Mexico5.0%

Brazil

13.0%

South Africa

8.1%

Rest of

the World

17.6%

Taiwan

10.7%

China

17.8%

Russia

6.0%Korea

15.5%

Larger Markets Smaller Markets

Regional Weights Benchmark Weights

Asia 59.9%

Europe 9.7%

Latin America 22.0%

Mideast/Africa 8.4%

Country Weight Country Weight

Asia Europe

Indonesia 2.8% Czech Republic 0.3%

Malaysia 3.7 Hungary 0.3

Philippines 0.9 Poland 1.4

Thailand 2.2 Turkey 1.7

Latin America Mideast/Africa

Chile 2.0 Egypt 0.3

Colombia 1.3 Morocco 0.1

Peru 0.7

US $3.4 trillion in market capitalization 819 companies

21 countries

Roughly 13% of the MSCI All Country World Index

Source: MSCI via FactSet as of July 31, 2012. The MSCI EM Index is a trademark of MSCI Inc. Countriesand weights are as of the date indicated, are subject to change and should not be relied upon as current thereafter.

The BRICS Account for Roughly Half of the MSCI EM Index


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16Source: JP Morgan, Factset, Morgan StanleyData as of October 12, 2012

Earnings in Emerging Markets are Expected to Grow in DoubleDigits Next Year

Projected MSCI Earnings Growth Rates and Valuations 2013

Region NTM EPS FPE Yield ROE GDP

US 12.3% 12.9 2.2% 15.2% 2.1%

Europe 8.9 10.8 3.9 11.3 0.4

Japan 37.0 11.1 2.7 4.4 0.6

Emerging 17.0 10.2 2.9 13.6 5.1

M R i Th W ld S h h P f


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December 31, 1987December 31, 2011

December 31, 2001December 31, 2011

S&P 500MSCIWorld MSCI EM S&P 500

MSCIWorld MSCI EM

Annualized Return 8.04 5.48 11.04 -2.82 -1.65 7.82

Annualized Standard Deviation 19.17 17.14 26.59 17.77 17.36 23.31

Beta to MSCI World 1.00 1.00 1.18 1.00 1.00 1.16

Correlation to MSCI World 0.93 1.00 0.79 0.97 1.00 0.87

Sharpe Ratio 0.28 0.16 0.32 0.06 0.12 0.50

Sortino Ratio 0.53 0.26 0.50 0.08 0.17 0.69

Source: Style Advisor (Data in Swiss FrancsPast performance is not a guarantee of future results.Index returns are unmanaged and do not reflect the deduction of any fees or expenses.Index returns reflect all items of income, gain and loss and the reinvestment of dividends and other income.

Mean Reversion Theory Would Suggest that the PerformanceDifference Between Emerging and Developed will Narrow


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2.1% 3.6% 6.5%

10.0%

11% 13%

31%

37%

50%

0%

10%

20%

30%

40%

50%

Insuranceallocation

Pension fundallocation

Currentinstitutional

allocation

Mutual fundallocation

Globall iquidity

MSCI AC-WIw eight

Globalmarket

capitalization

Nom in al GDP Gl ob algrowth

(2010-2020)

EM Share of World

As of end Aug 2010Source: CEIC, ERWIN, FactSet, IMF, MSCI, GS Global ECS Research estimates.

Emerging Markets Will Continue to Attract Institutional Flows

GLSTND-0567

37%

31%

13 %

49 %

44%

19%

59%

55 %

31 %

0%

10%

20%

30%

40%

50%

60%

70%

GDP M arket Cap M SCI World Wgt

EM Share of World

2010

2020E

2030E

2010 2020E 2030E


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China

'07 '08 '09 '10 '116

7

89

10

11

12

13

14

15

P

ercent

Source: China's National Bureau of Statistics

History as of Q2-12.

China's GDP Growth

China Real GDP, % chg y/y

China's CPI Inflation

'07 '08 '09 '10 '11 '12-4

-2

0

2

4

6

8

10

Percent

Source: China's National Bureau of Statistics

History as of Aug-12.

China CPI, % chg y/y


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%XWWKHUHLV6RPH'RXEW$ERXWWKH(FRQRP\V0RPHQWXPDQG3ROLF\PDNHUV5HVROYH

China

'07 '08 '09 '10 '11 '12-10

-5

0

510

15

20

25

30

Percent

Source: National Bureau of StatisticsHistory as of Aug-12.

China's Electricity Output

China Electricity Production, % chg y/y

'07 '08 '09 '10 '11 '1210121416182022

2426283032

Perc

ent

Source: People's Bank of ChinaHistory as of Aug-12.

China's Money Growth

China M2 Money Supply, % chg y/y


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Global Imbalances Are Slowly Falling

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

1992

1993

1994

1995

1996

1997

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2008

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2011

2012

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%O

F

G

Asia Ex-Japan Current Account Balance

Source: Morgan StanleyAs of September 2012


12/1313Source: Euromonitor, Morgan Stanley

As of December 2010

0306090

120150180210240270

1991

1992

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China India Russia Brazil Japan US

No

.ofHouseholdsinMillions

And Domestic Demand is Growing Rapidly in the BRICS

Number of Households with Disposable Income Over $10,000


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Conclusion

The global recovery remains substandard and several risks remain: Europe, US fiscal

cliff, China policy mistake and Iran

Emerging economies remain closely linked to the global economy, but are increasingly

resilient. They are expected to grow 5.4% in 2013, but risks are to the downside.

The Great Recession has enhanced the secular case for investing in emerging markets

Valuations in emerging markets are not demanding by historic norms, but earnings

estimates are being revised downwards

Emerging Markets Outlook

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