The document provides an overview and commentary on Templeton Emerging Markets investments for the quarter ended September 30, 2011. Concerns over sovereign debt in Europe and the US dominated markets in the quarter. Emerging markets declined sharply, with the MSCI Emerging Markets Index falling 22.46% in US dollar terms. Growth slowed or weakened in many major emerging economies like China, India, Brazil, and Russia. Central banks in some countries cut rates to support growth. Overall, heightened global risks and economic uncertainties led to a challenging quarter for emerging markets.

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 European
Executive 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 Emerging
1. Source: MSCI. The unmanaged MSCI Emerging Markets
Indices 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 indices
include reinvested dividends. One cannot invest directly in year-to-date.1, 2
an index, nor is an index representative of the Fund’s
portfolio. All MSCI data is provided “as is.” The Fund
described herein is not sponsored or endorsed by MSCI. Regional Update
In no event shall MSCI, its affiliates or any MSCI data
provider 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 or
redistributing the MSCI data is strictly prohibited.
GDP grew 9.5% year-over-year (y/y) in the second quarter of 2011 compared to
2. © 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 quarter
contained herein: (1) is proprietary to Morningstar and/or of 2010. Nevertheless, it is important to note that China continues to have one
its 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 were
Neither Morningstar nor its content providers are
responsible 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 strength
A 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 billion
take place in global markets, it’s often difficult to
provide up-to-date materials that address the most
current situations. The following update is valid only as
of September 30, 2011. NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE

2. TEMPLETON EMERGING MARKETS OVERVIEW As of September 30, 2011
in July to US$17.8 billion in August. The one-year lending During U.S. Secretary of State Hillary Rodham Clinton’s
and deposit interest rates were raised by 25 basis points (bps) visit to India in July, the U.S. signed a preliminary agreement
to 6.56% and 3.50%, respectively, in July, but inflationary on cyber-terrorism with India and vowed to continue supporting
pressures 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 Brazil
index 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/y
as pork and vegetable prices stabilized as a result of government
in the second quarter, mainly due to weaker growth in the
efforts. The fourth China-UK Economic and Financial Dialogue
manufacturing sector. Growth in industrial production slowed
was 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 second
trade, investment and financial cooperation and signed two
quarter. Brazil’s central bank unexpectedly cut its benchmark
memorandums of understanding in the areas of energy and
interest rate by 50 bps to 12.0% at the end of August, to make
infrastructure. To improve regional relations, China also signed
the real less attractive and boost manufacturing amid an
a 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, increasing
South 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 prices
quarter 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 rate
Private consumption and facilities investment, however, in more than five years. High inflation and relatively higher
supported 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 from
growth, 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 the
bank’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, largely
y/y in August, higher than the 4.7% y/y increase in July,
due to declines in the manufacturing, mining and agriculture
due to higher food, housing and transportation costs. The
sectors. Growth in government expenditure, retail trade
Bank 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 at
trade agreement with the European Union (EU) took effect
5.5% during the second quarter to support domestic growth
on 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 higher
completed a three-country trip to Mongolia, Uzbekistan and
risks to the domestic economy. In August, inflation remained
Kazakhstan 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’s
three months of 2011 to 7.7% y/y in the second quarter. trade balance recorded a deficit of US$555 million in July
Concerned about the country’s high inflation rate, the Reserve compared to a surplus of US$697 million in June due to
Bank of India raised its repo and reverse repo interest rates higher fuel imports and a decline in metal exports. Exports
by 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 first
and 9.4% y/y in April. Growth in industrial production
quarter of 2011 to 3.4% y/y in the second quarter, largely
decreased 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 weak
weakness in the manufacturing sector. To improve regional
consumer demand. Although the central bank left its benchmark
relations, Prime Minister Manmohan Singh visited Bangladesh
refinancing interest rate unchanged at 8.25%, it cut its repo
in September. Although the two countries signed a number
interest rate by 25 bps to 5.25% and raised the deposit interest
of trade and cooperation accords, they did not reach an
rate by 25 bps to 3.75%. Inflationary pressures continued
agreement on the transit of Indian goods through Bangladesh.
to ease in August, with the consumer price index moderating
Franklin Templeton Investments franklintempleton.com 2

3. TEMPLETON EMERGING MARKETS OVERVIEW As of September 30, 2011
from 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 of
thus far this year. Higher investment and retail sales growth a number of developed markets such as Portugal, Greece
indicated strengthening domestic demand in July. Investment or Ireland, for example. In fact, the way we see it, the debt
expenditure rose 7.9% y/y and retail sales increased 5.6% problems of the U.S. and Europe have placed greater emphasis
y/y in July. Domestic demand was partly driven by growth on the current fiscal and fundamental strength of several
in 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, in
presidential elections in favor of Prime Minister Vladimir Putin.
our opinion. We think large cuts in state budget expenses need
Additionally, Deputy Prime Minister and Finance Minister
to be implemented in order to save the eurozone. The crisis
Alexei Kudrin resigned from the Cabinet after a dispute with
in the eurozone could well have negative implications for
the President over his policies.
global growth, impacting countries globally, not just those
While growth in Turkey eased in the second quarter of 2011, within the region. However, not all countries are likely to be
GDP still grew a scorching 8.8% y/y. This compared to an impacted in the same way. Thus, we think it is important to
incredible 11.6% y/y growth rate in the first three months look at each country separately and be able to differentiate
of the year. Key drivers of growth included strong private between strong and weak economies. Thus far, we have seen
consumption and fixed investment growth. Weakness in no significant economic impact of developed-market debt
the 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 invest
than the 8.8% y/y increase in the first quarter. Fixed investment,
with a long-term horizon in companies that we believe are
however, jumped 28.9% y/y in the second quarter. Concerns
undervalued, fundamentally strong and growing. We remain
about the weak global environment and the eurozone debt
positive on our key investment themes—consumer and
crisis led the central bank to cut its key interest rate by 50 bps
commodities—and remain diligent and disciplined in our
to 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% to
5.0% to support the weak lira. Inflationary pressures increased
in August, with the consumer price index rising to 6.7% y/y A Few Words about Risk
from 6.3% y/y in July, largely due to high transport prices. Special risks are associated with foreign investing, including
Foreign Minister Ahmet Davutoglu visited Brazil in September, currency fluctuations, economic instability and political
where he held talks with his counterpart, Antonio de Aguiar developments. Investments in emerging markets, of which
Patriota. Both leaders promised to increase cooperation as frontier markets are a subset, involve heightened risks related
well as trade and economic relations going forward. Brazilian to the same factors, in addition to those associated with these
President 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.
Outlook
Many emerging markets have continued to record relatively A note to our readers: Given the rapid changes that can take
strong 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. The
markets 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 markets
over the years. We believe several emerging markets are in
remains accompanied by heightened risks when compared
a better position than many of their developed counterparts,
to developed markets, including risks related to market and
due 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 markets
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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.
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