Presentation


     Cemig Conference:
      Bienal da Energia


  “The Future of
Emerging Markets”
               By
     ...
How the world is changing…

       September 27, 2008




  In the same week that Secretary
 Paulson and Fed Chairman Bern...
How the world is changing…

       September 27, 2008




  In the same week that Secretary
 Paulson and Fed Chairman Bern...
Crises – then… and now


1994     Mexican Financial crisis

1998     Asian Financial Crisis


2008 American Financial Cris...
At the root of the current financial crisis and
loss of competitiveness


For decades, the US (and the rest of the
“develo...
A long-term shift makes its power felt

   Where is much manufacturing done?
   Who has all the money these days?
   Where...
Quite an evolution in 25 years

25 years ago                Remember
 Peripheral                 China: experiments
 Poor ...
The 20th century

“West”             Emerging Markets
 Wealth             Debt
 Surpluses          Deficits
 Technology   ...
Already 25% of global economy

                  Global Population        Global Economy
         15%
                    ...
Emerging markets are now as important as the
  United States in the global economy
 Nominal GDP (US$ trillion)

 16       ...
Emerging markets in the 21st century

 Now central to the global economy, no longer
 peripheral
 A major factor in commodi...
Outspending US and Europe on infrastructure
in a major boom
                 Gross Fixed Capital Investment (US$ trillion)...
Emerging markets today


 Mobile phones are universal
 Emerging markets own 75% of all foreign exchange
 reserves
 Macro-e...
The emerging consumer is not burdened with debt


                                          Household debt/GDP
           ...
Emerging markets external debt vs. reserves
                                                                          Rese...
The West is less and less the center of
 the universe



1.   Less dominant
2.   The competitive edge is shifting



     ...
Risks have shifted
      BRICs (Brazil, Russia, India and China)

                                      Data in US$ billio...
How important are the BRICs?

        Together over half of the U.S. economy and about half
        of emerging economies
...
Resilience of the BRICs is high

Huge foreign exchange cushion
No longer basket cases but good macro-policies
Governments ...
Emerging multinationals are becoming
   world-class


   75 of global Fortune 500 from emerging markets
   (19 in 2000)
  ...
Companies are much bigger
                        Number of companies with market cap
                        of $1 billio...
25 “World Class” Emerging Multinationals

Not just China or Asia
Asia (14) Latin America (10)
Korea      4     Brazil     ...
#1 global market share - examples
• memory semiconductors            Samsung
• flat screens                     Samsung
• ...
We need emerging markets

  Emerging markets will lead the way out of
  “Great Recession” – crucial to global recovery
  R...
The future of emerging markets


Current global slowdown:
    Largely avoided financial crisis
    First-in, first-out of ...
The future: a 10 year perspective

1. One billion new consumers:
     Less dependence on the “West”
     “Chindia” as impo...
The Yin and Yang of the Emerging Markets Century




                               “We have, at most, 10
                ...
The future: a 25 year perspective

1. China will be the anchor economy
     Replacing the United States
     Back to pre-I...
The future: 25 years
   BRICs outpacing G7 economies

                              Projected GDP (US $ trillion)

       ...
China aggressively expanding R&D spending

                                                          R & D as % of GDP (20...
De-railment or
re-emergence?
   The American
financial crisis and
 its impact on the
future of emerging
      markets
The headlines got it wrong

1. Not a “global” financial crisis but a half-
   global financial crisis
     US and part of ...
Outlook
- During Q4 the global economy fell off a cliff and emerging
  markets were also hard-hit
- Dramatic drops in indu...
First in, first out
1. Emerging markets are less leveraged at a
   national, corporate and household level
2. For the firs...
Volatility has come way down again everywhere
125       VIX and EEM Implied Volatility (30D Put Option)


100             ...
Credit default swaps plummeted from panic levels

 1100

 1000

  900

  800

  700
                                      ...
Currency devaluations are reversing
20%


10%
                                                     Brazil -16%

 0%

     ...
Freight rates remain low but are up from bottom

350                                                                      ...
Metals have bounced back from the bottom



150

125                                                                      ...
Less concern that oil will go to $30 or lower
% increase


   500
   450                                                  ...
The impact of the crisis

1. Big earnings decline in emerging markets in 2009
2. Only 2% economic growth (little growth ex...
Up 50% since October 2008 bottom and 41% better than the
 developed markets (EAFE)
50


40                                ...
re-emerging”
Emerging markets are “re-emerging”
500

450 ..Emerging markets gave back all of their
    ..                 ...
Since their peak, emerging markets moved in line
 10
       with EAFE (and did better than Europe)
   0

 -10

 -20

 -30
...
…and this year they continue to outperform
30

25
20                                                                 MSCI ...
Unprecedented intervention

   A foundation has been built for ultimate
   recovery


 1. Determination to save systemic b...
Is the future rosy or scary?
Fiscal and monetary stimulus will promote confidence
and put the world back on a growth path ...
Turnaround: a sharp come back


  1. Deeper but faster than expected
        - Great recession but not great depression
  ...
How good are the alternatives?

1. U.S. superpower status has suffered
  …over-extension, financial crisis and the rise of...
The world has changed
 Emerging markets will be the right place to
 be over the next decades
 … as opportunities and risks...
END




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Palestra: O Futuro dos Países Emergentes. Palestrante: Antoine van Agtmael

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Inserção desses países na dinâmica da economia mundial, comparando oportunidades, desafios e

riscos de cada um na economia local e global, assim como o potencial de crescimento associado ao comércio

internacional e ao mercado interno.

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Palestra: O Futuro dos Países Emergentes. Palestrante: Antoine van Agtmael

  1. 1. Presentation Cemig Conference: Bienal da Energia “The Future of Emerging Markets” By Antoine W. van Agtmael Chairman and CIO Emerging Markets Management, LLC and author of The Emerging Markets Century 0
  2. 2. How the world is changing… September 27, 2008 In the same week that Secretary Paulson and Fed Chairman Bernanke begged Congress for a bail-out package to avoid a financial meltdown… 1
  3. 3. How the world is changing… September 27, 2008 In the same week that Secretary Paulson and Fed Chairman Bernanke begged Congress for a bail-out package …Chinese celebrated to avoid a financial meltdown… their first space walk 2
  4. 4. Crises – then… and now 1994 Mexican Financial crisis 1998 Asian Financial Crisis 2008 American Financial Crisis This time around, emerging markets are not the problem but suffered “collateral damage” and may be part of the solution 3
  5. 5. At the root of the current financial crisis and loss of competitiveness For decades, the US (and the rest of the “developed world”) have been over-consuming and over-leveraging under-investing and under-saving … emerging markets have been under-consuming while investing in their infrastructure and becoming lenders and investors 4
  6. 6. A long-term shift makes its power felt Where is much manufacturing done? Who has all the money these days? Where are financial crises originating now? Who has current account surpluses now? Where are the budget deficits? From where do we get our oil and gas? Where do multinationals see most of their growth? Who graduates most engineers? A monumental shift in risks and opportunities 5
  7. 7. Quite an evolution in 25 years 25 years ago Remember Peripheral China: experiments Poor (“Third world”) Russia: Soviet Behind India: bureaucratic Protected Brazil: a mess Undiscovered 6
  8. 8. The 20th century “West” Emerging Markets Wealth Debt Surpluses Deficits Technology Cheap labor Innovation Imitation Infrastructure Poor/few roads, ports, power plants The new reality is rapidly changing 7
  9. 9. Already 25% of global economy Global Population Global Economy 15% 25% 75% 85% Emerging Developed Source: World Bank Atlas; JP Morgan 8
  10. 10. Emerging markets are now as important as the United States in the global economy Nominal GDP (US$ trillion) 16 Emerging Markets 14 U.S. 12 10 Euro Area 8 excl. EM 6 4 2 - 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 Source: J.P. Morgan 9
  11. 11. Emerging markets in the 21st century Now central to the global economy, no longer peripheral A major factor in commodity prices from oil and metals to food “Home” markets have grown exponentially Emerging multinationals have become active in acquisitions – not over despite recession The world is not flat – it is tilting 10
  12. 12. Outspending US and Europe on infrastructure in a major boom Gross Fixed Capital Investment (US$ trillion) 4.5 Emerging Markets 4.0 …on top of nearly a billion new 3.5 consumers in emerging markets 3.0 within a decade U.S. 2.5 2.0 Euro Area excl. EM 1.5 1.0 0.5 - 1987 1997 2007 Source: J.P. Morgan 11
  13. 13. Emerging markets today Mobile phones are universal Emerging markets own 75% of all foreign exchange reserves Macro-economic policies are sound Financial systems are solid Infrastructure boom not just in China Catching up fast 12
  14. 14. The emerging consumer is not burdened with debt Household debt/GDP 2007 % US 100% UK 110% Australia 114% Korea 82% China 16% India 17% Brazil 14% Russia 10% Mexico 16% Source: JP Morgan, Credit Suisse, Morgan Stanley, EMM calculations as of 9/19/2008 13
  15. 15. Emerging markets external debt vs. reserves Reserves Debt as % of expressed as Exports months of imports 130 10.0 120 9.0 110 8.0 100 7.0 90 6.0 80 5.0 70 60 4.0 2001 2002 2003 2004 2005 2006e 2007f Source: Institute of International Finance 14
  16. 16. The West is less and less the center of the universe 1. Less dominant 2. The competitive edge is shifting A new group of countries – BRICs and other major emerging markets - are becoming key players 15
  17. 17. Risks have shifted BRICs (Brazil, Russia, India and China) Data in US$ billion 1990 2000 2008 GDP 2,255 2,563 8,875 Inflation (%) 594% 5.1% 7.7% FX Reserves 45 265 3,099 Foreign Debt 359 675 1,360 Reserves/Debt 0.1x 0.4x 2.3x Current Account -2 +41 +356 Budget Deficit -221 -91 +29 Exports 182 455 2,296 as % of world 6% 7% 15% Source: JP Morgan, EMM calculations as of 9/19/2008 16
  18. 18. How important are the BRICs? Together over half of the U.S. economy and about half of emerging economies This past year, BRIC consumption contributed 1.1% to global growth, against 0.2% for US consumption Consumption is only 45% of GDP against over 70% in the United States The BRIC consumer saves a lot and has little debt (although it has grown) Source: Merrill Lynch 17
  19. 19. Resilience of the BRICs is high Huge foreign exchange cushion No longer basket cases but good macro-policies Governments have domestic credibility Ability to ease and support banks Room to increase fiscal spending “Under-consumption” (China”) and low household debt Long-awaited opportunity to retool economies toward health care and “greener” growth 18
  20. 20. Emerging multinationals are becoming world-class 75 of global Fortune 500 from emerging markets (19 in 2000) 28 from China alone (leads emerging markets) Potential for many existing “world size” companies to become “world class” World class competitors but also potential business partners Source: Fortune 500; EMM 19
  21. 21. Companies are much bigger Number of companies with market cap of $1 billion or greater 1600 1,428 1400 1200 1000 800 600 345 359 400 200 128 8 0 1987 1992 1997 2002 2007 Source: IFC, MSCI, EMM Research 20
  22. 22. 25 “World Class” Emerging Multinationals Not just China or Asia Asia (14) Latin America (10) Korea 4 Brazil 4 Taiwan 4 Mexico 4 India 3 Argentina 1 China 2 Chile 1 Malaysia 1 Africa (1) South Africa 1 21
  23. 23. #1 global market share - examples • memory semiconductors Samsung • flat screens Samsung • LNG shipping MISC • athletic and casual shoes Yue Yuen • contract manufacturing Hon Hai • deep sea drilling Petrobras • regional jets Embraer • iron ore Vale • market pulp Aracruz 22
  24. 24. We need emerging markets Emerging markets will lead the way out of “Great Recession” – crucial to global recovery Remain net savers and have built up a $5 trillion reserve cushion in addition to $2 trillion in sovereign wealth funds – can take a blow Most global growth now comes from emerging markets The emerging consumer will need to pull the world out of the recession 23
  25. 25. The future of emerging markets Current global slowdown: Largely avoided financial crisis First-in, first-out of economic crisis New respect: G-20 instead of G-7 In three years (post-recession): Stronger: one-third of global economy (vs. 25%) Much more intra-EM trade and investment More regional swap lines 24
  26. 26. The future: a 10 year perspective 1. One billion new consumers: Less dependence on the “West” “Chindia” as important as US or EU 2. BRICs will be among the new G-7 (or 10) No longer junior partners Bigger voice in UN, IMF, WTO, G-20 3. Moving away from a carbon-based world China a leading player in electric cars Brazil a leading player in biofuels 25
  27. 27. The Yin and Yang of the Emerging Markets Century “We have, at most, 10 years to alter the trajectory of global greenhouse emissions.” --NASA scientist Jim Hansen, July 2006 “If not reversed, environmental degradation threatens to become a major impediment to economic development in China and India” - Der Spiegel 26
  28. 28. The future: a 25 year perspective 1. China will be the anchor economy Replacing the United States Back to pre-Industrial Revolution times 2. Emerging markets will be over 50% of the global economy A tectonic shift 3. R&D will be more broad-based Mobile access to information globally Lower-cost, higher share, better education 27
  29. 29. The future: 25 years BRICs outpacing G7 economies Projected GDP (US $ trillion) BRICS G7 Emerging Developed 2005 4.2 27.3 8.9 32.4 2030 28.2 43.0 46.8 51.6 2050 90.0 64.2 138.0 77.0 Emerging markets will surpass developed countries in about 25 years and will be nearly twice their size by mid-century Source: Goldman Sachs for BRICs/G7, EMM calculations for Emerging/Developed assuming G7/Developed countries will remain stable,BRICS/Emerging will increase, China will slow down and emerging market currencies will strengthen 28
  30. 30. China aggressively expanding R&D spending R & D as % of GDP (2005) Japan 3.1 US 2.7 Germany 2.5 France 2.3 UK 1.9 Korea 2.6 Taiwan 2.5 By By China 1.5 2010 2020 Russia 1.3 Brazil 1.0 India 0.8 South Africa 0.7 Chile 0.7 Mexico 0.4 Indonesia 0.0 0 0.4 0.8 1.2 1.6 2 2.4 2.8 3.2 Source: IMD World Competitiveness Report 2002 and 2005, Fortune Innovation Insider. 29
  31. 31. De-railment or re-emergence? The American financial crisis and its impact on the future of emerging markets
  32. 32. The headlines got it wrong 1. Not a “global” financial crisis but a half- global financial crisis US and part of Europe and Eastern Europe No bank failures in emerging markets Strong but temporary effect on trade finance cuts 2. Emerging markets stopped producing before developed nations stopped consuming Recovery also earlier China major engine for recovery 31 31
  33. 33. Outlook - During Q4 the global economy fell off a cliff and emerging markets were also hard-hit - Dramatic drops in industrial production in Q408 in Korea, Taiwan, Russia, Brazil and many other emerging markets on quarter on quarter basis; now beginning to recover - “De-stocking phase” now largely over - Emerging consumer took fright but recovered quickly - Unemployment in US and Europe is still rising - Deleveraging will take a long time - It will take time for world trade to recover - Global GDP won’t grow as fast in the future 32
  34. 34. First in, first out 1. Emerging markets are less leveraged at a national, corporate and household level 2. For the first time, active counter-cyclical fiscal and monetary stimulus 3. Exports are not the only growth driver; production is already stabilizing 4. Policy room to stimulate in Asia, automatic stabilizers in Latin America (esp. Brazil) 5. Flexible: current accounts remain strong as imports adjusted as fast as exports dropped 6. Healthy corporate balance sheets: most corporations have strong balance sheets and enough cash to weather this storm 33
  35. 35. Volatility has come way down again everywhere 125 VIX and EEM Implied Volatility (30D Put Option) 100 EEM Implied Volatility 43.0 75 50 VIX Index 25 33.0 0 10/25/07 01/26/08 04/28/08 07/30/08 10/31/08 02/01/09 05/05/09 Source: Bloomberg: VIX; EEM IV; 10/25/2007-05/05/2009 34 34
  36. 36. Credit default swaps plummeted from panic levels 1100 1000 900 800 700 Russia 600 500 400 Turkey 300 S Africa 200 Korea 100 0 10/31/07 01/31/08 05/02/08 08/02/08 11/02/08 02/02/09 05/05/09 Source: Bloomberg: Oct 31, 2007 – May 6, 2009 35 35
  37. 37. Currency devaluations are reversing 20% 10% Brazil -16% 0% Russia -25% -10% S.Africa -18% -20% India -21% -30% Korea -27% -40% 12/31/07 02/18/08 04/07/08 05/26/08 07/14/08 09/01/08 10/20/08 12/08/08 01/26/09 03/16/09 05/04/09 Source: Bloomberg; 12/31/2007-05/05/2009 36 36
  38. 38. Freight rates remain low but are up from bottom 350 Up 306% 300 250 200 -82% 150 100 50 0 -50 -100 09/30/05 03/13/06 08/24/06 02/04/07 07/18/07 12/29/07 06/10/08 11/21/08 05/04/09 drop… As exports slow and commodities drop… Source: Baltic Freight Index, Bloomberg; Sept 2005- May 6, 2009 37 37
  39. 39. Metals have bounced back from the bottom 150 125 Metals 100 75 Commodities 50 25 0 09/30/05 03/13/06 08/24/06 02/04/07 07/18/07 12/29/07 06/10/08 11/21/08 05/04/09 Source: Bloomberg CRB Index; Sept 2005- May 5, 2009 38 38
  40. 40. Less concern that oil will go to $30 or lower % increase 500 450 $147 400 350 300 250 200 150 100 $55 50 0 09/30/03 11/12/04 12/26/05 02/08/07 03/23/08 05/06/09 Source: Bloomberg: Brent Crude Spot September 30,2003 through May 6, 2009 39 39
  41. 41. The impact of the crisis 1. Big earnings decline in emerging markets in 2009 2. Only 2% economic growth (little growth ex-China) in 2009, turnaround in Q2, recovery (4-5%) in 2010 3. Recession (-2%) in US/EU/Japan but recovery in 2010 4. 1% slower growth pace in developed and emerging markets over coming decade 5. Larger share of global consumption in emerging markets as consumers in US/EU deleverage 6. More government-led investment, less business investment over next 1-3 years 7. After steep fall, uptick in metal and oil prices 40 40
  42. 42. Up 50% since October 2008 bottom and 41% better than the developed markets (EAFE) 50 40 MSCI IMI Net +50% 30 20 10 0 -10 MSCI EAFE Net +9% -20 10/24/08 11/17/08 12/11/08 01/04/09 01/28/09 02/21/09 03/17/09 04/10/09 05/04/09 Source: MSCI Net: IMI, EAFE; Oct 24, 2008 – May 5, 2009 41 41
  43. 43. re-emerging” Emerging markets are “re-emerging” 500 450 ..Emerging markets gave back all of their .. +470% gains of the past three years but still 400 made more money longer term 350 …while developed -43% MSCI EM Net 300 markets have done much worse longer term and 250 recently 200 150 MSCI EAFE Net 100 50 0 09/30/02 01/16/06 05/04/09 Source: MSCI Net, EAFE Net; Sept 30, 2002 – May 5, 2009 42 42
  44. 44. Since their peak, emerging markets moved in line 10 with EAFE (and did better than Europe) 0 -10 -20 -30 -40 MSCI EAFE Net - 44% -50 -60 -70 MSCI IMI Net - 43% -80 10/24/07 12/25/07 02/25/08 04/27/08 06/28/08 08/29/08 10/30/08 12/31/08 03/03/09 05/04/09 -90 -100 Source: MSCI Net: IMI, EAFE; Oct 24, 2007 – May 5, 2009 43 43
  45. 45. …and this year they continue to outperform 30 25 20 MSCI IMI Net +26% 15 10 5 0 -5 -10 -15 MSCI EAFE Net - 0.1% -20 -25 -30 12/31/08 01/31/09 03/03/09 04/03/09 05/04/09 Source: MSCI Net: IMI, EAFE; Dec 31, 2008 – May 5, 2009 44 44
  46. 46. Unprecedented intervention A foundation has been built for ultimate recovery 1. Determination to save systemic banks 2. Serious fiscal and monetary stimulus 3. Emerging markets participated for the first time and now have seat at the table (G-20) 45
  47. 47. Is the future rosy or scary? Fiscal and monetary stimulus will promote confidence and put the world back on a growth path later in 2009 Even in serious recessions negative growth moderates after “destocking” Not only the crisis but also fiscal stimulus is unprecedented for many decades A new burst of innovation is required to stave of environmental gridlock – solar, batteries, LED, new materials Crises typically spur innovation 46
  48. 48. Turnaround: a sharp come back 1. Deeper but faster than expected - Great recession but not great depression 2. Markets always get worse than anyone expects in a downturn - When the financial system suffers from cardiac arrest, investors have a collective nervous breakdown 3. “Hot money” reversal is mostly behind us 4. Markets typically turn around before the economy improves and do so suddenly - There is now upside as well as downside risk 47 47
  49. 49. How good are the alternatives? 1. U.S. superpower status has suffered …over-extension, financial crisis and the rise of new powers …crises can no longer be resolved by national or even G-7 actions – a globalized world requires global action plans 2. U.S. no longer has unquestioned credit standing …more dollar volatility …Middle East and other “new rich” will invest more in other emerging markets 3. American consumer is no longer king … years of over-consumption and over-borrowing need to be adressed …one billion new consumers over next decade 4. Europe has its own problems Investors must get used to big new realities 48
  50. 50. The world has changed Emerging markets will be the right place to be over the next decades … as opportunities and risks have shifted … as they continue to benefit from a dramatic tilting in the global economy … as they come out of the current crisis and slowdown faster and stronger We are entering The Emerging Markets Century 49
  51. 51. END 50

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