Templeton Emerging Markets


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Dr. Mark Mobius

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Templeton Emerging Markets

  1. 1. Templeton Emerging Markets Overview Commentary for the Quarter Ended September 30, 2011 Overview Concerns about sovereign debt in the eurozone remained at the forefront throughout the third quarter of 2011, especially as investors debated the likelihood of a Greek default in September. Fiscal concerns in the U.S. and the subsequent downgrade of the U.S.’ sovereign credit rating in August further worried nervous investors. The U.S. Federal Reserve’s disappointing “Operation Twist” did little to calm investors, and in fact, led to increased volatility and market declines globally.DR. MARK MOBIUS In an effort to restore market confidence, a coordinated action by the EuropeanExecutive Chairman Central Bank to increase U.S. dollars in the European banking system was announced.Templeton Emerging Markets Group Germany’s lower house of parliament also approved the expansion of the US$595 billion European Financial Stability Facility (EFSF) in September. While“ Intracountry trade within emerging markets has also been growing rapidly, and reliance on traditional these actions provided some immediate relief, markets resumed their downtrend on worries that the U.S. might slip back into an economic recession later this year and concerns about the lack of a more comprehensive solution to the eurozone’s debt crisis. markets like the U.S. and Europe Within the emerging markets universe, easing economic growth, high inflation has declined over the years. We and a fragile global environment led governments and central banks to adopt believe several emerging markets various fiscal and monetary policies. Brazil and Turkey made surprise moves to cut interest rates in August, but India raised rates a further 75 basis points. are in a better position than many In this environment, emerging markets, as measured by the MSCI Emerging of their developed counterparts, Markets Index, ended the quarter with a 22.46% decline in U.S.-dollar terms.1, 2 due to their higher reserves and Weaker emerging market currencies and lower commodity prices also contributed to the decline. lower debt levels. ” As of September 30, 2011, the MSCI Emerging Markets Asia Index returned -21.09% for the quarter and -19.78% year-to-date; the MSCI Emerging Markets Latin America Index returned -24.51% for the quarter and -25.69% year-to-date; the MSCI Emerging1. Source: MSCI. The unmanaged MSCI Emerging MarketsIndices are free float-adjusted, market capitalization- Markets EMEA Index returned -24.23% for the quarter and -22.43% year-to-date;weighted indices designed to measure equity market and the MSCI South Africa Index returned -16.80% for the quarter and -19.96%performance in regional emerging markets. The indicesinclude reinvested dividends. One cannot invest directly in year-to-date.1, 2an index, nor is an index representative of the Fund’sportfolio. All MSCI data is provided “as is.” The Funddescribed herein is not sponsored or endorsed by MSCI. Regional UpdateIn no event shall MSCI, its affiliates or any MSCI dataprovider have any liability of any kind in connection with the Gross domestic product (GDP) growth in China continued to decelerate in 2011.MSCI data or the information described herein. Copying orredistributing the MSCI data is strictly prohibited. GDP grew 9.5% year-over-year (y/y) in the second quarter of 2011 compared to2. © 2011 Morningstar. All Rights Reserved. The information growth of 9.7% y/y in the first quarter of the year and 9.8% y/y in the last quartercontained herein: (1) is proprietary to Morningstar and/or of 2010. Nevertheless, it is important to note that China continues to have oneits content providers; (2) may not be copied or distributed;and (3) is not warranted to be accurate, complete or timely. of the highest growth rates in the world. Consumer spending and investment wereNeither Morningstar nor its content providers areresponsible for any damages or losses arising from any use the key drivers of growth in the first half of 2011. Strong import growth, up 30.2%of this information. y/y in August to a record high of US$155.6 billion, signaled continued strengthA note to our readers: Given the rapid changes that can in domestic demand and led China’s trade surplus to narrow from US$30.5 billiontake place in global markets, it’s often difficult toprovide up-to-date materials that address the mostcurrent situations. The following update is valid only asof September 30, 2011. NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE
  2. 2. TEMPLETON EMERGING MARKETS OVERVIEW As of September 30, 2011in July to US$17.8 billion in August. The one-year lending During U.S. Secretary of State Hillary Rodham Clinton’sand deposit interest rates were raised by 25 basis points (bps) visit to India in July, the U.S. signed a preliminary agreementto 6.56% and 3.50%, respectively, in July, but inflationary on cyber-terrorism with India and vowed to continue supportingpressures eased in August, allowing the central bank to leave India’s fight against terrorism.rates unchanged in subsequent months. The consumer price In line with the trend witnessed globally, GDP growth in Brazilindex moderated from 6.5% y/y in July to 6.2% y/y in August eased from 4.2% y/y in the first quarter of 2011 to 3.1% y/yas pork and vegetable prices stabilized as a result of government in the second quarter, mainly due to weaker growth in theefforts. The fourth China-UK Economic and Financial Dialogue manufacturing sector. Growth in industrial production slowedwas held in September, where both countries agreed to increase from 3.5% y/y in the first quarter to 1.7% y/y in the secondtrade, investment and financial cooperation and signed two quarter. Brazil’s central bank unexpectedly cut its benchmarkmemorandums of understanding in the areas of energy and interest rate by 50 bps to 12.0% at the end of August, to makeinfrastructure. To improve regional relations, China also signed the real less attractive and boost manufacturing amid ana series of bilateral agreements with Mongolia, Nepal, Laos, environment of weakening global growth. Prior to the cut,Cambodia and Tajikistan in August. the bank had embarked on a strong tightening cycle, increasingSouth Korea’s GDP growth eased from 4.2% y/y in the first rates five times by a total of 175 bps in 2011. Consumer pricesquarter of 2011 to 3.4% y/y in the second quarter due to continued to exceed the bank’s upper target limit of 6.5%,weaker export growth and sluggish construction investment. with prices increasing 7.2% y/y in August, the highest ratePrivate consumption and facilities investment, however, in more than five years. High inflation and relatively highersupported growth. Industrial production growth reached interest rates in 2011 continued to impact the retail sector,its lowest level in ten months due to weaker manufacturing where sales growth moderated to 7.7% y/y in July fromgrowth, growing 3.8% y/y in July compared to an increase 9.3% y/y in June.of 6.4% y/y in June. Inflation continued to exceed the central In South Africa, GDP growth eased from 3.5% y/y in thebank’s upper target limit of 4.0%. Consumer prices rose 5.3% first quarter of 2011 to 3.0% y/y in the second quarter, largelyy/y in August, higher than the 4.7% y/y increase in July, due to declines in the manufacturing, mining and agriculturedue to higher food, housing and transportation costs. The sectors. Growth in government expenditure, retail tradeBank of Korea, however, left its key interest rate unchanged and financial services, however, supported economic growth.at 3.25% due to heightened global risks. South Korea’s free The central bank maintained its benchmark interest rate attrade agreement with the European Union (EU) took effect 5.5% during the second quarter to support domestic growthon July 1 and is expected to lead to greater trade between and it lowered GDP growth forecasts from 3.7% to 3.2%South Korea and the EU trade bloc. President Lee Myung-bak for 2011, and from 3.9% to 3.6% for 2012, citing highercompleted a three-country trip to Mongolia, Uzbekistan and risks to the domestic economy. In August, inflation remainedKazakhstan to develop trade, economic and investment relations. steady and within the central bank’s 3%–6% target range.GDP growth in India edged down from 7.8% y/y in the first Consumer prices rose 5.3% y/y in August. The country’sthree months of 2011 to 7.7% y/y in the second quarter. trade balance recorded a deficit of US$555 million in JulyConcerned about the country’s high inflation rate, the Reserve compared to a surplus of US$697 million in June due toBank of India raised its repo and reverse repo interest rates higher fuel imports and a decline in metal exports. Exportsby 75 bps to 8.25% and 7.25%, respectively. The consumer declined 6.7% y/y, while imports rose 8.5% y/y in July.price index eased to 8.4% y/y in July, from 8.6% y/y in June GDP growth in Russia moderated from 4.1% y/y in the firstand 9.4% y/y in April. Growth in industrial production quarter of 2011 to 3.4% y/y in the second quarter, largelydecreased from 8.8% y/y in June to 3.3% y/y in July due to due to a decline in industrial production growth and weakweakness in the manufacturing sector. To improve regional consumer demand. Although the central bank left its benchmarkrelations, Prime Minister Manmohan Singh visited Bangladesh refinancing interest rate unchanged at 8.25%, it cut its repoin September. Although the two countries signed a number interest rate by 25 bps to 5.25% and raised the deposit interestof trade and cooperation accords, they did not reach an rate by 25 bps to 3.75%. Inflationary pressures continuedagreement on the transit of Indian goods through Bangladesh. to ease in August, with the consumer price index moderatingFranklin Templeton Investments franklintempleton.com 2
  3. 3. TEMPLETON EMERGING MARKETS OVERVIEW As of September 30, 2011from 9.0% y/y in July to 8.2% y/y in August, its lowest rate are currently trading at much lower spreads than those ofthus far this year. Higher investment and retail sales growth a number of developed markets such as Portugal, Greeceindicated strengthening domestic demand in July. Investment or Ireland, for example. In fact, the way we see it, the debtexpenditure rose 7.9% y/y and retail sales increased 5.6% problems of the U.S. and Europe have placed greater emphasisy/y in July. Domestic demand was partly driven by growth on the current fiscal and fundamental strength of severalin consumer loans, as consumer credit increased 26.5% y/y emerging markets.in July. In politics, Russian President Dmitry Medvedev The sovereign debt crisis in the eurozone is a serious problem,announced his intention to step aside in the March 2012 and European governments need to promptly address it, inpresidential elections in favor of Prime Minister Vladimir Putin. our opinion. We think large cuts in state budget expenses needAdditionally, Deputy Prime Minister and Finance Minister to be implemented in order to save the eurozone. The crisisAlexei Kudrin resigned from the Cabinet after a dispute with in the eurozone could well have negative implications forthe President over his policies. global growth, impacting countries globally, not just thoseWhile growth in Turkey eased in the second quarter of 2011, within the region. However, not all countries are likely to beGDP still grew a scorching 8.8% y/y. This compared to an impacted in the same way. Thus, we think it is important toincredible 11.6% y/y growth rate in the first three months look at each country separately and be able to differentiateof the year. Key drivers of growth included strong private between strong and weak economies. Thus far, we have seenconsumption and fixed investment growth. Weakness in no significant economic impact of developed-market debtthe export sector, however, adversely impacted GDP growth. problems on emerging economies.Exports edged up 0.2% y/y in the second quarter, much lower In terms of our investment strategy, we continue to investthan the 8.8% y/y increase in the first quarter. Fixed investment, with a long-term horizon in companies that we believe arehowever, jumped 28.9% y/y in the second quarter. Concerns undervalued, fundamentally strong and growing. We remainabout the weak global environment and the eurozone debt positive on our key investment themes—consumer andcrisis led the central bank to cut its key interest rate by 50 bps commodities—and remain diligent and disciplined in ourto a record low of 5.75% in August. The bank did, however, stock selection process within sectors related to these themes.raise its borrowing interest rate significantly from 1.5% to5.0% to support the weak lira. Inflationary pressures increasedin August, with the consumer price index rising to 6.7% y/y A Few Words about Riskfrom 6.3% y/y in July, largely due to high transport prices. Special risks are associated with foreign investing, includingForeign Minister Ahmet Davutoglu visited Brazil in September, currency fluctuations, economic instability and politicalwhere he held talks with his counterpart, Antonio de Aguiar developments. Investments in emerging markets, of whichPatriota. Both leaders promised to increase cooperation as frontier markets are a subset, involve heightened risks relatedwell as trade and economic relations going forward. Brazilian to the same factors, in addition to those associated with thesePresident Dilma Rousseff is expected to visit Turkey in October. markets’ smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets.OutlookMany emerging markets have continued to record relatively A note to our readers: Given the rapid changes that can takestrong growth, compensating somewhat for the slower growth place in global markets, it’s often difficult to provide up-to-in developed markets. Intracountry trade within emerging date materials that address the most current situations. Themarkets has also been growing rapidly, and reliance on following update is valid only as of September 30, 2011.traditional markets like the U.S. and Europe has declined The significant growth potential offered by emerging marketsover the years. We believe several emerging markets are in remains accompanied by heightened risks when compareda better position than many of their developed counterparts, to developed markets, including risks related to market anddue to their higher reserves and lower debt levels. The perceived currency volatility, adverse social and political developments,strength of emerging markets is also now visible in credit and the relatively small size and lesser liquidity of these markets.default swap (CDS) spreads—CDS of many emerging marketsFranklin Templeton Investments franklintempleton.com 3
  4. 4. The information provided is not a complete analysis of every Investors should carefully consider a fund’s investment material fact respecting any country, industry, security or goals, risks, charges, and expenses before investing. investment. Opinions expressed are those of Dr. Mobius and To obtain a summary prospectus and/or prospectus, which are subject to change without notice. Statements of fact have contains this and other information, talk to your financial been obtained from sources considered reliable. Because market advisor, call us at (800) DIAL BEN/342-5236, or visit and economic conditions are subject to rapid change, his franklintempleton.com. Please carefully read the prospectus analyses are valid only as of September 30, 2011. His opinions before you invest or send money. are intended to provide insight as to how he analyzes securities and are not intended as individual investment advice. Performance information is historical and should not be considered predictive of future results. All securities investments fluctuate and involve risks. < G AIN FR O M O U R PER SPECT IV E ® >VA L U E BLEND GROWTH SECTOR GLOBAL I N T E R N AT I O N A L HYBRID A S S E T A L L O C AT I O N FIXED INCOME TA X - F R E E I N C O M E Franklin Templeton Distributors, Inc. Franklin Templeton Investments One Franklin Parkway, San Mateo, CA 94403-1906 Your Source For: (800) DIAL BEN ®/ 342-5236 • Mutual Funds • 529 College Savings Plans TDD/Hearing Impaired (800) 851-0637 • Retirement Plans • Separate Accounts franklintempleton.com © 2011 Franklin Templeton Investments. All rights reserved. TLEM COMM 09/11