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FondsKongress Presentation The Outlook for Global Emerging Market Equities. 1 st February 2006. Schroder Investment Management Limited 31 Gresham Street, London, EC2V 7QA Telephone: 020 7658 6000 Fax: 020 7658 6965 Authorised and regulated by the Financial Services Authority. - PowerPoint PPT Presentation
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27026
1st February 2006
FondsKongress Presentation The Outlook for Global Emerging Market Equities
Schroder Investment Management Limited31 Gresham Street, London, EC2V 7QA
Telephone: 020 7658 6000Fax: 020 7658 6965
Authorised and regulated by the Financial Services Authority
27026
5 year (Annualised)* 3 year (Annualised)*10 year (Annualised)*
4.0%
4.5%
5.0%
5.5%
6.0%
6.5%
7.0%
7.5%
16.0% 17.0% 18.0% 19.0% 20.0% 21.0%
Emerging Markets Efficient Frontiers vs Europe
Annualised return (%p.a.)
MSCI Europe 100%
EM 40%
EM 20%
EM 60%
EM 80%
MSCI EM 100%
Annualised return (%p.a.) Annualised return (%p.a.)
Source: Factset, MSCI. *All figures are US$ MSCI Price returns to 30 December 2005
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
15.5% 16.5% 17.5% 18.5% 19.5%
MSCI EM 100%
EM 60%
EM 80%
EM 40%
EM 20%
MSCI Europe 100% 18.0%
20.0%
22.0%
24.0%
26.0%
28.0%
30.0%
32.0%
34.0%
36.0%
12.5% 13.5% 14.5% 15.5% 16.5%
MSCI EM 100%
EM 60%
EM 80%
EM 40%
EM 20%
MSCI Europe 100%
Cumulative ReturnMSCI EM +54.1%
MSCI Europe +100.2%
Cumulative ReturnMSCI EM +111.7%
MSCI Europe +6.5%
Cumulative ReturnMSCI EM +141.9%
MSCI Europe +69.2%
Emerging markets are excellent diversifiers
Annualised Risk (%SD pa) Annualised Risk (%SD pa) Annualised Risk (%SD pa)
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Relative Performance of MSCI EM/World and OECD G7 Lead Indicator
Cyclical recovery
Economics
Source: Thomson DataStream, data shown to December 2005
-6
-4
-2
0
2
4
6
8
Dec-90 Jun-93 Dec-95 Jun-98 Dec-00 Jun-03 Dec-05
-60
-40
-20
0
20
40
60
OECD G7 Lead Indicator MSCI EM / MSCI World Free (rhs)
yoy % change yoy % change
Cyclical upturn supportive for gems
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Global Growth
CPI
Interest Rates
EM Performance
2.1%
1.5%
2.3%
0% to -10%
3.2%
2.9%
2.8%
+35%
Country
Global Economic Outlook for 2006
2.9%
2.1%
3.2%*
+10% to +15%
3.7%
2.8%
4.0%
+20%
2005
(60% probability)
Scenario 1Base Case
(30% probability)
Scenario 2Growth
Resurgence(10% probability)
Scenario 3Ice Age
*Fed fund rates to peak at 4.75% Q1 2006Source: Schroders
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EconomicsOutlook remains positive
2004Consensus %
World
USJapanEuropean Union
Latin AmericaNorth East AsiaSouth East AsiaEastern Europe
+3.8
+4.2+2.3+2.3
+5.8+7.9+6.3+7.2
2005Consensus %
+3.2
+3.6+2.4+1.6
+4.2+7.2+5.0+5.3
2006Consensus %
+3.2
+3.4+2.0+2.1
+3.9+6.9+5.0+5.3
World GDP Growth
Source: Consensus Economics December 2005
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Difference in real GDP Growth (Emerging vs Developed) and Relative Performance Differential (MSCI EM vs MSCI World)
Emerging Market economies decoupling
Economics
Source: CSFB, data shown to December 2005
-4.0-3.0-2.0-1.00.01.02.03.04.05.06.0
Mar-89 Mar-92 Mar-95 Mar-98 Mar-01 Mar-04
306090120150180210240270300
Real GDP growth differential (LHS)
Relative performance MSCI EM vsMSCI World (rhs)
Mar 1989 = 100
*CLSA estimateSource: CLSA
26.0*
25.9
24.9
24.2
2005
2004
2003
2000
Global GDP represented by Emerging Markets (%)
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4
8
12
16
20
24
1996 1998 2000 2002 2004 2006
U.S.** China **
Share in Emerging Market* Exports
Emerging Market* Exports
Economics
Source: BCA Research December 2005* Includes Brazil, Chile, Turkey, Taiwan, Korea, Thailand, Singapore, Malaysia, Indonesia, The Philippines and India
** Smoothed except for final data points
%
China now accounts for almost same share of emerging economies’ exports as the US
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G7NorthEast AsiaSouthEast AsiaEastern EuropeLatin America
Economics
Economic Forecast
GDP Growth
+2.4+6.5+5.2+5.0+3.8
IndustrialProduction
+2.5 +10.8+6.9+5.8+4.3
Current Account
(% of GDP)
-0.9+1.2+5.1-0.5-0.8
CPI
+2.0 +2.9+3.4+4.0+4.4
Source: Consensus Economics October 2005
2011 – 2015 (Average)
Decoupling… continues
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95
105
115
125
135
145
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05
G7 Industrial Production
GEM Industrial Production*
Industrial Production
GEM Industrial Production Outperforming G7 Industrial Production
Economics
Source: Thomson Datastream, EIU, Factsheet, ML GEM Equity Research, August 2005* Weighted by MSCI, includes: Brazil, Mexico, Korea, Taiwan, China, India, Turkey and South Africa. Data rebased to 1/2000
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Debt/GDP
EMBI+ Sovereign rating
Inflation
Fiscal balance
Current account balance
Gross external financing requirement as % of GDP
GDP growth
Exports to GDP
Average 3 month volatility
Structural improvement
Economics
43.0%
BB-
56%
-3.1%
-2.1%
4.2%
6.7%
19.0%
8%
1994
0.1%
2 points
-52%
2.1%
3.9%
1.5%
-2.0%
15.2%
2.4%
2005 minus 1994
43.1%
BB+
4%
-1.0%
1.8%
5.7%
4.7%
34.2%
10.4%
2005
Change in leading emerging market parameters end 1994 - 2005Area
Source: Deutsche Bank January 2006
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Emerging Markets
Foreign debt Trade balanceEmerging markets*: Foreign reserves
10
12
14
16
18
20
22
24
26
28
94 96 98 00 02 04 06
Foreign reserves
Some structural shifts
% of GDP
% of GDP % of GDP
*Includes 20 Emerging Market economiesSource: BCA Research December 2005
24
26
28
30
32
34
36
94 96 98 00 02 04 06
Foreign debt
-1.5
-0.5
0.5
1.5
2.5
3.5
94 96 98 00 02 04 06
Trade Balance
Record high A sharp decline
A dramatic turnaround
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Economics
...Exchange rates undervalued, not overvalued
… Current accounts now in surplus
Inflation well and truly beaten
Structural Improvement
Source: JP Morgan, data shown to December 2005
0
100
200
300
400
500
600
Jan-92
Oct-94
Jul-97
Apr-00
Feb-03
Nov-05
GDP weighted-average EmergingMarket inflation rates
%
75
80
85
90
95
100
105
110
90 93 96 99 02 05
Real effective exchange rate (median)
Jan 90 =100
-2
-1
0
1
2
3
4
96 97 98 99 00 01 02 03 04 05e
Emerging Markets current account %GDP
% GDP
Source: JP Morgan, data shown to December 2005Source: JP Morgan, data shown to November 2005
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EM
US
Japan
Europe
Developed Markets
EM minus Developed Markets
GEM and Developed MarketsKey macroeconomic data
4.2
3.0
0.5
1.9
2.3
1.9
06 (%)
CPI
(%)
2.1
-6.4
3.3
0.0
-3.2
5.3
05 (%)
CA Bal
(% of GDP)
-1.7
-2.7
-5.7
-2.8
-3.1
1.4
05 (%)
Fiscal Bal
(% of GDP)
-1.9
-3.3
-5.0
-2.8
-3.3
1.4
06 (%)
44.4
65.7
174.3
70.0
79.9
35.5
05 (%)
Total Govt
Debt (%
GDP)
1.3
-6.8
3.3
0.3
-3.3
4.6
06 (%)
Country
Source: Deutsche Bank, MSCI, Bloomberg. Data shown at 16 November 2005
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0
2
Dec-97 Dec-99 Dec-01 Dec-03 Dec-05
BBB-
BBB
BBB+
Market Cap Weighted GEM Credit Rating
Structural improvements have led to improved credit rating
Economics
Source: UBS December 2005
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MSCI EM Historical volatility
As economies have improved, volatility has declined
Risk
Source: Bloomberg, data shown to December 2005
0%
10%
20%
30%
40%
50%
Dec-93 May-96 Oct-98 Mar-01 Aug-03 Dec-05
MSCI EM 10 week volatility
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Risk:
5 year market performance
5 Years: Volatility (%)
$(%) Return
Sharpe Ratio
16.5%
-1.1%
-0.07
25.8%
-2.2%
-0.09
15.1%
0.6%
0.04
24.8%
1.1%
0.05
18.4%
22.6%
1.22
15.6%
2.4%
0.15
19.8%
6.8%
0.35
22.7%
2.6%
0.11
GEMSS&P 500
Russell2000
Nasdaq ACWI EAFE DAX Nikkei
… Resulting in excellent Sharpe ratios
Source: Deutsche Bank GEMs Strategy, Bloomberg, MSCI, data shown for 30 December 2005
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MSCI EM Relative to MSCI World
Relative price still well below 1994 highs
4080
120160200240280320360400
Dec-88 May-92 Oct-95 Feb-99 Jul-02 Dec-05
MSCI EM relative to MSCI World
Source: Factset, MSCI. MSCI Gross indices quoted
24.3%
180.6%
MSCI World
MSCI EM
31 December 1998 to 30 December 2005
Source: Thomson DataStream, data shown to December 2005
US$
Dec 1988 = 100
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MSCI EM Price Earnings Ratio*
P/E ratio also at low historic levels
Valuations
* P/E ratio shown is MSCI EM from 30 September 1995. Prior to 30 September 1995 IFCI P/E ratio is shownSource: Factset, Thomson DataStream, data shown to December 2005
10
15
20
25
30
35
40
45
Dec-91 Apr-94 Aug-96 Dec-98 Apr-01 Aug-03 Dec-05
MSCI EM P/E
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Forward Price Earnings
Valuations
0
5
10
15
20
25
Jun-94 Oct-96 Feb-99 May-01 Sep-03 Dec-05
MSCI EM Forward P/E
Source: Factset, MSCIAs at December 2005, IBES – 12 month forward
Source: Factset, MSCI, data shown to December 2005
US$
… Forward P/E also at low historic levels
EmergingMarkets USA World
10.8
14.3
0.8
15.3
13.9
1.1
14.8
12.2
1.2
P/E
EPS
PE/G
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Price Earnings Discount
Valuations
-70%-60%-50%-40%-30%-20%-10%
0%10%20%30%
Jan-92 May-94 Sep-96 Jan-99 May-01 Aug-03 Dec-05
MSCI EM relative to MSCI World Forward P/E
Source: Thomson Datastream, data shown to December 2005
%
Cheap relative to developed markets
Emerging Markets at a Discount
Emerging Markets at a Premium
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Price Earnings / Growth Ratio*
Valuations
-80%
-70%-60%
-50%-40%
-30%
-20%-10%
0%
93 96 98 01 03 05
MSCI EM vs MSCI US MSCI EM vs MSCI World
* 12m rolling average of I/B/E/S 12m Forward P/E to Long Term average EPS growth (3–5 years)
Source: Factset data shown to December 2005
%
Cheap relative to developed markets
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Yields from different asset classes
Valuations
0
1
2
3
4
5
6
7
8
9
10
EMEquities
US HighYield
Bonds**
UKEquities**
EMUEquities**
EMSovereign
Bonds
USEquities**
JapaneseEquities*
US AAABonds**
USTreasurys
Yield %
Cheap relative to other asset classes
* Forward Earnings Yield for Equities** Corporate Bond
Source: BCA Research December 2005
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MSCI EM ROE relative to MSCI World ROE
ValuationsUnderpinned by improving ROE
Source: CSFB, data shown to December 2005
0.0
0.5
1.0
1.5
2.0
2.5
Jan-92 May-94 Aug-96 Dec-98 Apr-01 Aug-03 Dec-05
MSCI EM ROE / MSCI World ROE
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GEM Aggregate Index / GDP
ValuationsReasonably priced relative to size of economies
Source: UBS, data shown to December 2005
0
50
100
150
200
250
300
Jan-88 Aug-91 Mar-95 Oct-98 May-02 Dec-05
GEM Aggregate Index/GDP
%
-1Std
Avg
+1Std
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Monthly change in flows for Emerging Market dedicated funds
LiquidityFund flow was supportive during second half of 2005
Source: EmergingPortfolio.com, data based on 352 dedicated GEM funds and is shown to November 2005
-3000
-2000
-1000
0
1000
2000
3000
Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05
US$m
Volatile flows have not affected performance
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1998
1999
2000
2001
2002
2003
2004
YTD 30/11/05
Foreign Fund Flows into Emerging Markets
2,228.5
3,563.6
-164.4
-350.8
-868.6
5,896.2
-2,268.3
2,265.3
Global US$m Emerging MarketsEquity New Inflows
Source: EmergingPortfolio.com, data based on 352 dedicated GEM funds and is shown to November 2005
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Concerns
– $ weakness
– Rising interest rates
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Monthly change in flows for Emerging Market dedicated funds
ConcernsA weak Dollar has been positive for Emerging Markets
Source: Thomson Datastream, data shown to December 2005
80
85
90
95
100
105
110
115
Dec-90 Jun-93 Dec-95 Jun-98 Dec-00 Jun-03 Dec-05
0
5
10
15
20
25
30
35
Trade-weighted US$
MSCI Emerging Markets relative to MSCI World in localcurrency (rhs)
Inverted Scale US$m
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2
4
6
8
10
12
14
16
76 81 86 91 96 01
02468101214161820
10-Year treasury yield (LS)Fed funds target rate (RS)
ConcernsInterest rate cycles have been associated with financial crises
Source: BCA Research December 2005
Bubbles?
– High yield
– EM Debt
– Real Estate
%
First Penn
LCD Crisis
Continental III
1987 Crash
S&L Crisis
MexicanPeso Crisis
Asian Crisis
Tech Bubble Burst
Do we need another crisis for Fed Tightening to stop?
%
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85
90
95
100
105
110
-12 -10 -8 -6 -4 -2 0 2 4 6 8 10 12Mean, EM rel. to the US Median Perf, EM rel to US
ConcernsEmerging Markets tend to falter when US rates peak
Source: Citigroup Investment Research, Datastream, MSCI, Worldscope and IBES
Emerging Markets Perf. Rel to US peaks 2 to 3 months before US Rate Hike Cycle Peaks
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5 year correlation of key factors to GEM
-0.67
0.02
0.380.48 0.5 0.53
-0.73-0.9
-0.6
-0.3
-0
0.3
0.6
0.9
EMBI+ VIX GlobalM2
US 10YrYield
LocalCurrency
OECDLeadingIndicator
Copper
Source: Deutsche Bank, MSCI, Bloomberg. Data shown for October 2005
GEMs are positively correlated with rising US 10 year yields
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Summary
Economics
– Global slowdown, but modest
– Emerging Market economies have been decoupling
– Emerging Market economies have gone through structural improvement
Valuations
– Remain attractive
Concerns
– $ weakness supportive, provided not excessive
– Over zealous monetary tightening
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Global Emerging Markets Strategy
Source: Schroders, 6th January 2006
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The Case for BRIC
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2003
World Population
BRICs nearly 3 times the population size of the OECD
Source: World Bank, World Development Indicators Database April 2005
Population(2003, millions)
176.6
143.4
1,064.4
1,288.4
Brazil
Russia
India
China
914.6
6,272.5
OECD
World
BRICS43%
Rest of World57%
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Emerging Markets stages of development
BRICs at early stage of development …… therefore should grow faster
Source: World Bank, World Development Indicators Database April 2005GNI/capita 2003 data
Schroders
Ma
turi
ty
Time
Sub-Saharan Africa
IndiaChinaRussia
Brazil
Malaysia
Mexico
Czech/Hungary/Poland
S. KoreaIsrael
TaiwanHong Kong/Singapore G7
Frontier markets deregulation
Emerging markets Premium growth (5%-7%)
Established growth(3%-5%)
Mature economies(2%-3%)
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2003*
GDP
2040**
BRICs small but growing percentage of World GDP
Source: * World Bank, World Development Indicators Database April 2005** Goldman Sachs
GNI per capita*2003 (US$)
2,720
2,610
540
1,100
37,870
Brazil
Russia
India
China
USA
29,360
5,510
OECD
World
Rest of World92%
BRICS8%
BRICS40%Rest of
World60%
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BRICS31%
Rest of World69%
2005E
Global Growth Split
2040
BRICs to be 67% of global growth by 2040
GS BRICs Model ProjectionsSource: Goldman Sachs, ‘How solid are the BRICs ’
Global Economics Paper No:134 (Dec 2005)
BRICS67%
Rest of World33%
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China-India (Chindia) . . . the second-largest economy in 2004 on PPP basis
The largest economies in 2050
GDP
Source: Professor Lucas, University of Chicago – Sunday Times 25th September 2005
0
5000
10000
15000
20000
25000
30000
35000
40000
45000
50000
Ch US In Jpn Br Mex Russ Ger UK Fr
21.3
20.6
7.3
4.4
3.1
3.1
0 5 10 15 20 25
US
Chindia
Japan
Germany
France
UK
GDP (2005 US$bn) Proportional world GDP (PPP)
– Per OECD China is already bigger than 2 of G7 – Canada and Italy– By 2010 China will be 4th largest economy after US, Japan and Germany– “If China were cut off from foreign trade and investment its growth would be just 1-2% p.a. less.”
Source: GS BRICs Model Projections Source: World Bank
%
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BRICs growth of middle class
6.0
684.8
295.7
1195.4
390.2214.1
69.786.551.9164.3
1882.7
349.7
733.4
132.8
0.0200.0400.0600.0800.0
1000.01200.01400.01600.01800.02000.02200.0
Brazil China India Russia BRICs G6 USA
2005 2025
GS BRICs Model ProjectionsSource: Goldman Sachs, Dreaming with BRICs: the Path to 2050 (Oct 2003)
BRICs discretionary consumption will be key driver of global growth
Number of people above $3,000 in the BRICs vs G6 populationNumber, millions
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BRICs growth of middle class
0
200
400
600
800
1000
1200
1400
1600
1800
2000
Passenger cars TV sets PCs Mobile phonesBRICs 2005 est BRICs 2025 forecast 50% penetrationBRICs 2025 forecast 70% penetration
510%
Consumer durable growth*
*Schroders estimation using 50% and 70% of current developed market penetration rates. Assuming world population growth from 6.3bn to 7.6bn between 2003 and 2005
Source: Population forecasts - Goldman Sachs, Dreaming with BRICs: the Path to 2050 (Oct 2003), Penetration rates- HSBC Earthtrends, Schroders
…driving strong consumer growth
720%
140%
200%
550%
770%170%
230%
Nuber, millions
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Currency
-50.0 -45.0 -40.0 -35.0 -30.0 -25.0 -20.0 -15.0 -10.0 -5.0 0.0
Brazil
Russia
India
China
% Undervalued
PPP based on inflation differentials (not trade weighted)•Source: Bloomberg, Schroders. All data to Dec 2005 (based from Jan 2002)
BRICs currencies are undervalued on a PPP basis…
Purchasing power parity* (against US$)
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17.5%
18.0%
18.5%
19.0%
19.5%
20.0%
20.5%
23% 24% 25% 26% 27%
BRICs vs MSCI China 5 year
(Annualised)* BRICs vs MSCI India 5 year (Annualised)*
BRICs Efficient Frontiers
2%
7%
12%
17%
22%
23% 24% 25% 26% 27% 28%
Annualised return (%pa) Annualised return (%pa)
BRICs give higher returns and lower risk than single country portfolios
Source: Factset, Bloomberg, Schroders * all returns to 31 Dec 2005
BRICS 100%
BRICS 80%
BRICS 60%
BRICS 40%
BRICS 20%
MSCI China 100%
BRICS 100%BRICS 80%
BRICS 60%
BRICS 40%
BRICS 20%
MSCI India 100%
Annualised return (%SD pa) Annualised return (%SD pa)
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KOSPI Price Index
Precedent of Korea
0
200
400
600
800
1000
1200
75 80 85 90 95 00 05
Korea SE Composite (KOSPI) - PriceIndex (~KW)
Source: World Bank, World Development Indicators Database April 2005
GNI/capita US$
KOSPI growth %
$602 to $2,643
$2,643 to $9,459
150%
438%
1975 to 1986
1987 to 1994
Source: Korean National Statistical Office
GNI/capita 2003 US$
$2,720
$2,610
$540
$1,100
Brazil
Russia
India
China
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TAIEX Index
Precedent of Taiwan
0
2,000
4,000
6,000
8,000
10,000
12,000
79 83 87 91 95 99 03
TAIEX Index
Source: World Bank, World Development Indicators Database April 2005
GNI/capita US$
TAIEX growth %
$758 to $2,573
$2,573 to $9,591
40%
343%
1979 to 1983
1984 to 1992
Source: Directorate – General of Budget Accounting & Statistics Taiwan, Bloomberg
GNI/capita 2003 US$
$2,720
$2,610
$540
$1,100
Brazil
Russia
India
China
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Country AllocationBRICs
*Index levels calculated internally intra-monthSource: Schroders, 6th January 2006
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Disclosure Statement
The returns presented represent past performance and are not necessarily representative of future returns which may vary. The value of investments can fall as well as rise as a result of market or currency movements
Potential investors should be aware that investment in Emerging Markets involves an above average degree of risk and should be seen as long-term in nature. Less developed markets are generally less well regulated than mature markets, they may be less liquid and may have less reliable custody arrangements
Opinions
Schroders has expressed its own views and opinions in this presentation and these may change
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Identification
Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA
Telephone: 020 7658 6000, Fax: 020 7658 6965
Authorised and regulated by the Financial Services Authority