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1 2007 to 2014 : Emerging Markets Importance to Global GDP Growth Chris Taylor, Investment Director & Head of Research Neptune Investment Management
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2 Why Investors Must Think Global World is now multi-polar & growth is driven by inter & intra regional trade − Major trade flows: BRIC to neighbours; BRIC to BRIC; BRIC to OECD Global industry leaders now found anywhere in the world − Reflects structural shift in supply chains & manufacturing to cheapest locations Historically & currently non-OECD vs. OECD economies differ e.g. consumer = c.40% vs. c.70% − Exposure to both allows better risk management and portfolio diversification The Global Economy Has Evolved Source: Neptune Economics
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3 Why Emerging Markets? Emerging economies continue to drive global growth – Changing global economic balance of power → wealth transfer to EM – Increasing importance of trade between emerging market blocs – Low household debt, strong corporate balance sheets, stronger fiscal positions Ongoing structural shifts in emerging markets → driving growth forward – Population effects → demographic dividend – Infrastructure demand → to meet growth and replace obsolete equipment – Power investment → critical to facilitate ongoing economic growth – Rise of the consumer → growth of the middle class and increasing income – Resource intensive → convergence of resource intensity per capita The Long-Term Case for Investing in Emerging Markets Remains Intact
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4 The Global Environment BRICs have critical mass & economic momentum – Differ in economic structure from OECD countries – Low financial risk = less debt, more equity & structurally lower inflation – Companies and economies more open & better managed than previously What is the best approach? – Global sector based research essential to identify future sector & stock opportunities – Blend global equity and other asset classes to match risk appetite – Efficient diversification = concentrated portfolios Go ‘Global Unconstrained’ to Improve Diversification & Investment Returns
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5 Global Demand – The Shifting Balance Comparative proportion of global GDP* Source: *at market exchange rates, IMF The balance of global activity is shifting visibly to the naked eye 19952008 Advanced economies82%69% Emerging and developing economies18%31% United States25%23% BRICs7%14%
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6 Real Global Growth Forecasts (%) Source: Neptune Economics Team, September 2009 Please remember that forecasts are not a reliable indicator of future performance. The forecasts are Neptune’s personal views and as such this document is deemed to be impartial research. We do not undertake to advise you as to any change of our views. Economic forecasts point to emerging economies for growth potential
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7 Global GDP Forecasts - Methodology & Objectives Discover assumptions behind IMF WEO April 2009 forecasts Based on GDP/components data : UN statistics division 1970-2007 Calculated historic compound growth rates (CGRs) over 80s; 90; 00s Then forecast Real & Nominal $bn GDP figures 2008-2014 Fine tuned country forecasts using Neptune predictions Identify future distribution of Global GDP growth Assumed Emerging Markets = those outside of the OECD Carried out on National, Regional & Global, and Supply & Demand Basis
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8 Preliminary Findings Focused on nominal $ figures – best proxy for corporate revenues Supply side $bn national GDP generally bigger than Demand $bn value 2007 base year, some rounding errors, other activities = services Absolute closest fit to IMF forecasts to 2014 – Neptune forecasts (US, UK, Japan, France, Germany, BRICs) – Other OECD countries included at half their historic CGRs – Other non-BRIC, non-OECD countries flat in 2009; historic rates 2010 onwards 2008-2010 assumptions have the biggest impact on estimated GDP growth Neptune forecasts lower OECD consumption but are more optimistic on BRIC growth
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9 Global GDP – Demand Side 2007 vs. 2014 Source: Neptune Economics; please remember that forecasts are not a reliable indicator of future performance. The forecasts are Neptune’s personal views and as such this document is deemed to be impartial research. We do not undertake to advise you as to a change of our views. Global GDP grows $24 trillion to $30trillion 64% developing vs. 36% developed $15tn to $22tn demand from developing nations $8tn+ from developed countries Growth rate of developing nations double that of developed ones By 2014 export/import values same By 2014 Gross Fixed Capital same
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10 Global GDP – Supply Side 2007 vs. 2014 Source: Neptune Economics; please remember that forecasts are not a reliable indicator of future performance. The forecasts are Neptune’s personal views and as such this document is deemed to be impartial research. We do not undertake to advise you as to a change of our views. Same pattern as demand side Developing growth rate 5x developed Agriculture & manufacturing $bn increment 4x developed country $bn Incremental manufacturing $6 trillion developing vs. $1 trillion developed Implies that, sector by sector, the greatest growth potential exists in developing nations Neptune global sector research confirms this
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11 USA vs. China – Demand Side 2007 vs. 2014 Source: Neptune Economics; please remember that forecasts are not a reliable indicator of future performance. The forecasts are Neptune’s personal views and as such this document is deemed to be impartial research. We do not undertake to advise you as to a change of our views. China more important than the USA China $3.2tn to $3.7tn+ incremental demand vs. USA $2.3tn to $2.3tnonly China’s growth 5x US sectors China consumption increment $2.16tn vs. US at $1.89tn US consumption 2007 $12tn; China $1.69tn 2014 China Gross Capital Formation bigger than the US 2014 China’s exports trade bigger than the USA
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12 USA vs. China – Supply Side - 2007 v 2014 Source: Neptune Economics; please remember that forecasts are not a reliable indicator of future performance. The forecasts are Neptune’s personal views and as such this document is deemed to be impartial research. We do not undertake to advise you as to a change of our views. China more important than USA 2014 China manufacturing will be larger than the USA, $4.12tn v $2.0tn China’s manufacturing increment 4x USA ($1.4tn vs. $0.16tn) China’s construction is double the $ value increase of the USA Wholesale trade increment is the same but US almost 4x larger in 2007 Same with Other Activities (Services) but US 10x larger than China in 2007
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13 Financial Factors – Less Risk BRIC countries grow at 5% to 10% p.a. – Mostly real, some inflation Now better financed: equity/debt/FX reserves Emerging markets debt to GNP % ratio (1998 vs. 2007) – Overall fell 39% to 31% – Domestic up 20% to 23% – Foreign down 19% to 8% Paid down debt using current account surpluses Gross Fixed Asset Formation 2000 – 2005 (% of GDP) China40% Brazil19% Russia18% Source: FT, EIU, JPMorgan Reduction in Foreign / US$ Denominated Debt 1998 vs 2007 Argentina$100bn ↓ $30bn Nigeria$40bn ↓ $0bn Russia$40bn ↓ $12bn
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14 Country Foreign Exchange Reserve* 2008 GDP (US$)** Reserve as % of GDP China $1,946bn$4,222bn51.4% Russia $427bn$1,757bn24.3% India $255bn$1,237bn20.6% Brazil $193bn$1,665bn11.6% EU $534bn$18,930bn2.9% USA $78bn$14,330bn0.54% UK $65bn$2,787bn2.33% Huge transfer of wealth to Asia and commodity exports Non-OECD expansion driven more by equity than debt Foreign exchange reserves fund infrastructure improvement Latter will underwrite continued economic expansion by debottlenecking the economy, restraining inflation and raising employment Source: *Time Series Data, (Jan 09) **CIA World Factbook (Jan 09) Foreign Exchange Reserves vs. GDP
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15 Emerging Economies: Structurally Sound – Low Inflation Old risk = high & volatile inflation of 20% to 40% Reflected poor economic & corporate management (lower ROE) Added to investment risk & undermined REAL returns Since 1998, inflation sustained drop of 6% to 8% Driven by structural improvements in economy, companies & capital markets Source: IMF World Economic Outlook Database classification of emerging and developing countries and Neptune Economics (Jan 09)
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16 Global Stockmarket Comparisons YtY % EPS growthP/E RatioYieldROE 2009/082010/092011/102009/08 FTSE All-Share-8.323.3 14.34.817.8 S&P Comp-13.929.630.017.42.213.5 DJ EuroStoxx 600-13.227.928.315.63.712.0 Topix10.435.324.213.42.55.5 RTS $ 50-22.937.825.312.94.69.4 Bombay SE 10026.521.522.917.81.915.9 HK China H shs24.436.227.519.23.89.5 Brazil24.819.516.914.4 - 17.7 Equally weighted calculations used as at Sept 2009 Highest EPS growth outside OECD Return on Equity (ROE) nearer OECD P/E ratios nearer OECD Source: Neptune Economics; please remember that forecasts are not a reliable indicator of future performance. The forecasts are Neptune’s personal views and as such this document is deemed to be impartial research. We do not undertake to advise you as to a change of our views.
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17 MSCI World vs. Emerging Markets Sector Returns Source: *Neptune Research Jan 2000-Sept 2009; **Lipper as at 30.09.09 Indicative benchmark = 112%+ cumulative growth in UK retirement inflation * 7/10 Emerging Markets sectors outperformed benchmark 1 World sector outperformed benchmark; 3/10 lost money MSCI Sectors: 2000 – 2009 Cumulative £ returns** (%) All Countries (%) World (%) Emerging Markets (%) All Industry5.14143.13 Consumer Discretionary-16.88-20.45148.91 Consumer Staples82.8280.00212.71 Energy144.55129.02355.61 Financials13.755.51182.71 Healthcare31.7330.28196.24 Industrials22.3818.43100.74 IT-56.20-59.074.58 Materials134.74110.33333.03 Telecoms-39.08-47.8472.82 Utilities100.4195.50222.46
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18 Take A ‘Global Unconstrained’ Approach Global sector research and the understanding of the macro environment is essential to identify future sector and stock opportunities in any stockmarket Exposure to both Non-OECD and OECD economies allows better risk management High conviction, concentrated portfolios of c. 50 stocks that best represent the views of the Neptune research process Go ‘Global Unconstrained’ to Improve Diversification and Investment Return Potential
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19 Neptune’s Investment Strategy Keep portfolio focused on global sector leaders irrespective of country of origin Neptune research process entirely dedicated to identifying such stocks Global unconstrained approach to fully exploit investment opportunities across the globe
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20 Appendices
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21 Introduction to Neptune Investment Management Neptune was founded in May 2002 Nearly 80% of the company held by directors & employees Strong cash reserves (no debt) Significant investors in our own funds One of the top selling equity Fund Managers in the UK Current funds under management nearly £4.5 billion Global Equity Fund over £860 million Additional £180 million in segregated global equity mandates including one Local Authority Award winning company based in single office in Hammersmith, London Institutional team of 4 led by Alistair Wilson Company Structure Has Helped Bring Our Success Source: Neptune as at 30.09.2009 A Accumulation share class cumulative performance, in sterling with net income reinvested and no initial charges. The performance of other share classes may differ. Past performance should not be seen as a guide to future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuation and you may not get back the amount originally invested. This is intended for Professional Clients and Eligible Counterparties. Persons who do not fall within these categories must not act or rely on the contents of this document.
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22 Important Information This document is issued by Neptune Investment Management Limited (“Neptune”) which is authorised and regulated by the Financial Services Authority. Details of our regulatory status and authorisation by regulators in other countries are available from us on request. The Neptune web address is www.neptune-im.co.uk Neptune Funds are available to any persons that may be marketed to under the Financial Services and Markets Act (Promotion of Collective Investment Schemes) (Exemptions) Order 2001. Retail Clients should consult their Independent Financial Adviser or other authorised intermediary. This communication is only intended for persons resident in jurisdictions where such distribution or availability would not be contrary to local laws or regulations. The provision of investment services may be restricted in certain jurisdictions. You are required to acquaint yourself with any local laws and restrictions on the availability of any services described. Please check with your professional financial adviser as to whether such products are available in the country in which you are resident. None of our products are available to residents in the United States. Some information and statistical data herein has been obtained from sources we believe to be reliable but in no way are warranted by us as to their accuracy or completeness. These are the analyst’s personal recommendations and as such this document is deemed to be impartial research. We do not undertake to advise you as to any change of our views. This is not a solicitation or an offer to buy or sell. Neptune Investment Management Limited has produced this report for private circulation to Professional and Eligible Counterparties only. The material is not intended for the use of Retail Clients. All information and advice is given in good faith but without any warranty. Please remember that past performance should not be seen as a guide of future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuations and you may not get back the amount originally invested. Any past performance data that has not been shown is due to the information not being available. Neptune is not authorised to give investment advice and only provides information on Neptune products.
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