THE CASE FOR EMERGING MARKETS INVESTMENTS · Emerging markets are exciting, dynamic and in the hands of skillful investment managers, have the potential to be very profitable— a

THE CASE FOREMERGING MARKETS INVESTMENTS

Brazil

Emerging markets are exciting, dynamic and in the hands of skillful

investment managers, have the potential to be very profitable —

a situation that, as investors, we need to be aware of.

Thinking of the coffee metaphor, where was your morning cup from?

As a consumer nowadays you have the choice of some exotic types from

far-flung emerging markets, where countries have both appropriate

resources and dynamic businesses poised to take advantage of this vast

global market. The chances are, even if you’re fairly conservative in your

selection, your drink may well have originated in Brazil—the world’s largest

coffee producer and exporter for the last 150 years. Coffee plantations,

covering 10,000 square miles, are mainly located in the south-eastern

states of Minas Gerais, São Paulo and Paraná where the environment and

climate provide ideal growing conditions.

We should all be waking up to the exciting potential of emerging markets

and the importance of an appropriate allocation within our investment

portfolios. The economic conditions and resources available in the emerging

markets are perfectly suited to creating dominant companies in many

markets on a global scale. Past issues across these territories are being

lessened and removed as policy reforms bite and companies tighten their

business models, create strong brands and turn to the global stage rather

than being domestic market focused. In addition, as emerging market

nations grow rapidly—vast new consumer bases are also being created off

the back of new-found prosperity.

Read on for our five top reasons to consider investing in emerging markets.

WAKE UP AND SMELL THE COFFEE...

2 The Case for Emerging Markets Investments franklintempleton.lu

1. Source: International Monetary Fund, World Economic Outlook Database, April 2019. 2. The Price-to-Earnings (P/E) Ratio measures the forward P/E, based on earnings forecasted for the last 12 months (LTM).3. Source: MSCI via FactSet. Emerging Markets are represented by the MSCI Emerging Markets Index, Developed Markets are represented by the MSCI World Index and Developed Markets ex-U.S. are represented by the MSCI World Index excluding USA GR USD Index.

1 ECONOMIC GROWTH AND ATTRACTIVE VALUATIONS

Emerging markets display healthier, sometimes attention-grabbing, economic growth than the developed world in the main.

This has been one of the stand-out features for a long time and often cited in the list of advantages to investing in the region. As with all markets, macroeconomic risk is present but we typically see resilience displayed by these markets when they are shocked by external events and factors. While there is always a reaction, there is a rapid return to normality, underpinned by the strong fundamental economics.These vibrant economies support key growth engines—enabling companies to become global winners and promoting the growth of the emerging market consumer.

Attractive Market Valuations

As investors the most important thing we are seeing is that finding investments to benefit from these favorable economic conditions, together with the corporate growth that they foster, is available at a healthy discount to what we would pay for equivalent investments in the developed markets. This can be seen very clearly in the price-to-earnings differential shown in the graphic. Most importantly, this is a scenario that we see as sustainable—continuing attractive valuations will encourage foreign investment and should support the region’s economic growth and demographic development on an ongoing basis.

Emerging Markets and Developing Economies vs. Advanced Economies1

Annual Real GDP Growth (%) 2015–2019E

2015 2016 2017 2018E 2019E

0%

2%

4%

6%

Advanced Economics Emerging Markets and Developing Economies

For illustrative and discussion purposes only.

Past performance is not an indicator or a guarantee of future performance.

Price-to-Earnings Ratio (LTM) Comparisons2,3 As of 31 March 2019

<17.8DevelopedMarkets

14.9DevelopedMarketsex-U.S.

13.1EmergingMarkets


franklintempleton.lu The Case for Emerging Markets Investments 3

4. Source: Gfk Point of Sales (POS) Measurement data in 75+ markets. Monthly data to the end of November 2017, plus weekly data to 31 December 2017. Percentages are rounded.5. Source: FactSet, MSCI. As of 31 March 2019.6. Source: Internet live stats, www.internetlivestats.com, based on finalized internet user number for 2016.

2 THE TECHNOLOGY REVOLUTION

Technology marches on—there’s no getting away from it, nor from the daily advances which now affect our lives so deeply.

Companies in emerging markets are at the forefront of this drive, whether as the end-provider of consumer and industrial technology products and services, or as the supplier of the components and building blocks for developing technologies such as autonomous driving—many of the camera and control chipsets central to the control systems originate from companies in the emerging markets.

Leading Smartphone Sales (Units Sold in Millions)4

2008–2017

2008 2011 2013 2015 2017

0

400

800

1,200

Developed Markets Emerging Markets


Technology and the internet, in particular, are enabling the rise of emerging markets companies and also providing a platform for dynamic entrepreneurial businesses to succeed on the global stage. Even your smartphone—a device now found in most pockets—was likely assembled in the emerging markets, even if not designed there. Half a million iPhones are produced each day in the so-called ‘iPhone City’ in Zhengzhou, China. Emerging markets are also at the forefront of transformational technologies such as artificial intelligence, robotics and supercomputers.

MSCI EM Sector Evolution5

December 2006–March 2019

0%

10%

20%

30%

40%

2006 2009 2012 2015 2019

Energy/Materials Consumer IT/Communication Services



The Internet Effect

As an indication of this explosive growth in the emerging markets, India recently sped past the U.S. to become the world’s second largest internet user market behind the emerging market giant, China. A perfect example of the enabling power of the internet also creates new domestic consumer bases in the emerging markets – boosting both local economic growth and the revenues of those companies supplying the required goods and services.

Top 3 Countries by Internet Users6

China721,434,547

India462,124,989

USA286,942,362



7. Source: FactSet, MSCI. Sector weights are based on the MSCI EM Regional Indexes: EM Asia, EM Latin America, EM Europe, MSCI Arabian Markets and MSCI Frontier Markets Africa. Indices are unmanaged and one cannot invest directly in an index.

3 THE VALUE OF ACTIVE MANAGEMENT

There is an enduring danger which lurks beneath the surface with emerging markets investing—that of following the index. The largest countries and companies are so dominant that simply investing in line with index proportions has hidden pitfalls of unwanted portfolio concentration and associated risk.

The Sector Comparison and Growth Drivers Across Emerging Market Regions Vary Significantly7

As of 31 March 2019

19.5%

5.6%

19.5%

5.5%

19.6%

10.9%

0.5%

15.9%

7.0%

42.2%

0.0%

12.0%

3.7%

0.4% 0.0%

17.8% 15.7%

1.6% 0.0%

9.9%

Consumer Staples & Discretionary Energy Information Technology Materials

Asia Latin America Europe Arabian Markets Africa



This is why we employ active management to uncover the best opportunities—our analysts and managers across the globe can trawl far beyond the index to find the farthest-flung opportunities—usually exhibiting deeper value. Most often we now see these opportunities coming from medium- and smaller-sized companies and

further off the beaten track in the frontier markets—less established than emerging markets but with rewarding growth potential for those who can successfully navigate the associated risks. The low correlation of frontier markets with other global markets is a further benefit, adding additional diversification.


What’s more, the changeable landscape of the emerging markets means that active investing is paramount in order to avoid getting stuck in yesterday’s big story—as the table shows, the tides of winners and losers change regularly and to stay anchored could be problematic.

MSCI EM Index and Its Individual Constituency Countries8

Calendar Year Returns (USD) (%), 2014–2018

2014 2015 2016 2017 2018

Top 3Performers

Egypt 29.3

Hungary 36.3

Brazil 66.7

Poland 55.3

Qatar 30.7

Indonesia 27.2

Russia 5.0

Russia 55.9

China 54.3

Peru 1.6

Philippines 26.4

India -6.1

Peru 55.6

Korea 47.8

Russia 0.2

EM Index -1.8 -14.6 11.6 37.8 -14.2

Bottom 3Performers

Hungary -27.4

Brazil -41.2

Mexico -9.0

United Arab Emirates 2.9

Pakistan -34.2

Greece -39.9

Colombia -41.8

Egypt -11.4

Qatar -12.1

Greece -36.7

Russia -45.9

Greece -61.3

Greece -11.9

Pakistan -23.9

Turkey -41.1


8. Source: Morningstar Direct.


4 FAVORABLE DEMOGRAPHICS

Populations around us, communities through to cities, are evolving rapidly, permanently changing the economic landscape.

Ongoing demographic changes in the emerging markets are so substantial that they are likely to be recorded as a significant period of human history.

Mass urbanization is transforming emerging markets. By 2025, emerging markets will be home to over three-times the urban dwellers as the developed world. By 2050, it will be close to five-times. This will both fuel productivity and at the same time feed the boom in domestic consumer bases—new urbanites with new incomes, looking to create the lifestyles they aspire to.


9. United Nations, Department of Economic and Social Affairs, Population Division (2018). World Population Prospects: The 2018 Revision, Online Edition.10. United Nations, Department of Economics and Social Affairs, Population Division (2017). World Population Prospects: The 2017 Revision, CD-ROM Edition as of June 2017.

Emerging Markets also have a younger population with lower dependency, while developed market populations are aging at a faster rate. By 2030, 86% of the global working age population will live in Emerging Markets.

This paints a very clear picture of the potential for market dominance for those companies that can stay on top of this global trend—appropriately siting R&D and manufacturing centers whilst building brands that appeal to a burgeoning local consumer market as well as the global marketplace.

Urban Population Growth9

in Billions

0

1

2

3

4

5

6

7

1950 1965 1980 1995 2010 2025 2050 World Emerging Regions Developed Regions


World Population – Emerging Markets vs. Developed Markets10 2015, in Millions

Emerging Markets Developed Markets

300 200 100 0 100 200 300

0–4 5–9

10–14 15–19 20–24 25–29 30–34 35–39 40–44 45–49 50–54 55–59 60–64 65–69 70–74 75–79 80–84 85–89 90–94 95–99 100+

60 6040 20 0 20 40

Male Female Male Female



11. Source: World Development Indicators Database, World Bank as of 28/06/2018. Most recent data. Gross National Income (GNI) is measured on a per capita basis and the total calculation is an equally weighted average of the EM and DM respective universes.12. Source: Brookings Development, Aid and Governance Indicators: Raw Data as of January 2018.

5 THE EMERGINGCONSUMER

Economic growth is putting money in people’s pockets and, by the power of human nature, those people will consume more products and services, in turn driving local market growth. It’s a very simple dynamic—when incomes increase even the most frugal person will usually start increasing their standard of living.

History has seen this pattern many times in different countries. As productivity increases, jobs boom. Wages climb to attract and retain the best talent and people seek education so they can compete for those jobs. All this fuels growth—probably all the way to a developed economy.

As these consumers earn more, they will be compelled to spend some of that new found wealth on their families’ lifestyles. Consumers will also follow buying trends which emerge, a psyche that marketers are only too eager to cash-in on. Internet and technology (read mobile in particular) are also working their magic—internet allows consumers to access global brands in a way that wasn’t available a decade or so ago, with mobile making it more accessible.

DRIVING LOCAL MARKET GROWTHAnnualized Gross National Income (GNI) per Capita Growth11

(1998–2017)

Developed Markets

2.7%

Emerging Asia

4.8%

Emerging Markets

6.0%


Consumption by the Middle Class12

Cumulative Growth 2015–2030 USD Trillions

10%Emerging AsiaEmerging MarketsDeveloped Markets

193% 343%Growth Rate Growth Rate Growth Rate


13. Source: Franklin Templeton Investments (FTI). As of 31 March 2019. Investment professionals include research analysts, portfolio managers, directors and CIO.

SPECIALIZED EXPERTISE IN EMERGING MARKETS INVESTINGWe have described the vast geographical scale of the emerging markets and spoken of Franklin Templeton’s excellence in active management of emerging market assets. But, how exactly do we go about it? At the heart are Franklin Templeton Emerging Markets Equity and Templeton Global Macro Group—covering respectively equity and fixed income side of emerging markets investing. Both leveraging a distributed research teams with unparalleled local presence.

This is what distinguishes us from other emerging markets managers—we believe this local access is

critical and it is absolutely central to our investment process. Macroeconomic risks aside, the greatest risks in emerging markets investing are embedded in the business models of target investments. This is why the access is so important—truly understanding each company, its business model and perhaps most importantly, the individuals in charge and their attitudes.

Entrust Franklin Templeton with looking after your emerging markets investments to gain immediate and lasting access to the skills, knowledge and experience of this much-respected resource.

Franklin Templeton Emerging Markets Investment Offices13

AMERICAS

30+ 16 80+YEAR TRACK RECORD

COUNTRIES INVESTMENT PROFESSIONALS

4 LOCATIONS

EUROPEMIDDLE EAST

AFRICA7 LOCATIONS ASIA-

PACIFIC9 LOCATIONS

Buenos Aires

Rio de JaneiroSão Paulo

New York

ARGENTINA

BRAZIL

USA

Vienna

Warsaw

Bucharest

Cape Town

Istanbul

Dubai

Edinburgh

AUSTRIA

POLAND

ROMANIA

SOUTH AFRICA

TURKEY

UAE

UK

Hong KongShanghai

ChennaiHyderabadMumbai

Kuala Lumpur

Seoul

Ho Chi Minh City

CHINA

INDIA

MALAYSIA

SOUTH KOREA

VIETNAM

SINGAPORE

Cities:

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© 2019 Franklin Templeton Investments. All rights reserved. EM IAS B 03/19

MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed or produced by MSCI.

© 2019 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Indices are unmanaged and one cannot invest directly in an index.

© 2019 FactSet Research Systems Inc. All Rights Reserved. The information contained herein: (1) is proprietary to FactSet Research Systems Inc. and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither FactSet Research Systems Inc. nor its content providers are responsible for any damages or losses arising from any use of this information.

IMPORTANT INFORMATIONThis material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice.

The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market.

All investments involve risks, including possible loss of principal.

Data from third party sources may have been used in the preparation of this material and Franklin Templeton Investments (“FTI”) has not independently verified, validated or audited such data. FTI accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments opinions and analyses in the material is at the sole discretion of the user.

Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FTI affiliates and/or their distributors as local laws and regulation permits. Please consult your own professional adviser for further information on availability of products and services in your jurisdiction.

Australia: Issued by Franklin Templeton Investments Australia Limited (ABN 87 006 972 247) (Australian Financial Services License Holder No. 225328), Level 19, 101 Collins Street, Melbourne, Victoria, 3000. Austria/Germany: Franklin Templeton Investment Services GmbH, Mainzer Landstr. 16, 60325 Frankfurt/Main, Germany. Tel +49 (0) 69/27223-0, Fax +49 (0) 69/27223-120, [email protected]. Canada: Issued by Franklin Templeton Investments Corp., 5000 Yonge Street, Suite 900 Toronto, ON, M2N 0A7, Fax: (416) 364-1163, (800) 387-0830, www.franklintempleton.ca. Netherlands: FTIS Branch Amsterdam, World Trade Center Amsterdam, H-Toren, 5e verdieping, Zuidplein 36, 1077 XV Amsterdam, Netherlands. Tel +31 (0) 20 575 2890. Dubai: Issued by Franklin Templeton Investments (ME) Limited, authorized and regulated by the Dubai Financial Services Authority. Dubai office: Franklin Templeton Investments, The Gate, East Wing, Level 2, Dubai International Financial Centre, P.O. Box 506613, Dubai, U.A.E., Tel: +9714-4284100, Fax: +9714-4284140. France: Issued by Franklin Templeton France S.A., 20, rue de la Paix, 75002 Paris, France. Hong Kong: Issued by Franklin Templeton Investments (Asia) Limited, 17/F, Chater House, 8 Connaught Road Central, Hong Kong. Italy: Issued by Franklin Templeton International Services S.à r.l. – Italian Branch, Corso Italia, 1 – Milan, 20122, Italy. Korea: Issued by Franklin Templeton Investment Trust Management Co., Ltd., 3rd fl., CCMM Building, 12 Youido-Dong, Youngdungpo-Gu, Seoul, Korea 150-968. Luxembourg/Benelux: Issued by Franklin Templeton International Services S.à r.l. – Supervised by the Commission de Surveillance du Secteur Financier – 8A, rue Albert Borschette, L-1246 Luxembourg – Tel: +352-46 66 67-1 – Fax: +352-46 66 76. Malaysia: Issued by Franklin Templeton Asset Management (Malaysia) Sdn. Bhd. & Franklin Templeton GSC Asset Management Sdn. Bhd. Poland: Issued by Templeton Asset Management (Poland) TFI S.A.; Rondo ONZ 1; 00-124 Warsaw. Romania: Issued by Bucharest branch of Franklin Templeton Investment Management Limited (“FTIML”) registered with the Romania Financial Supervisory Authority under no. PJM01SFIM/400005/14.09.2009, and authorized and regulated in the UK by the Financial Conduct Authority. Spain: FTIS Branch Madrid, Professional of the Financial Sector under the Supervision of CNMV, José Ortega y Gasset 29, Madrid, Spain. Tel +34 91 426 3600, Fax +34 91 577 1857. South Africa: Issued by Franklin Templeton Investments SA (PTY) Ltd which is an authorised Financial Services Provider. Tel: +27 (21) 831 7400, Fax: +27 (21) 831 7422. Switzerland: Issued by Franklin Templeton Switzerland Ltd, Stockerstrasse 38, CH-8002 Zurich. UK: Issued by Franklin Templeton Investment Management Limited (FTIML), registered office: Cannon Place, 78 Cannon Street, London EC4N 6HL, Tel +44 (0)20 7073 8500. Authorized and regulated in the United Kingdom by the Financial Conduct Authority. Nordic regions: Issued by FTIS Stockholm Branch, Blasieholmsgatan 5, SE-111 48, Stockholm, Sweden. Tel +46 (0)8 545 012 30, [email protected]. FTIS is authorised and regulated in the Luxemburg by the Commission de Surveillance du Secteur Financier and is authorized to conduct certain financial services in Denmark, in Sweden, in Norway and in Finland. Offshore Americas: In the U.S., this publication is made available only to financial intermediaries by Templeton/Franklin Investment Services, 100 Fountain Parkway, St. Petersburg, Florida 33716. Tel: (800) 239-3894 (USA Toll-Free), (877) 389-0076 (Canada Toll-Free), and Fax: (727) 299-8736. Investments are not FDIC insured; may lose value; and are not bank guaranteed. Distribution outside the U.S. may be made by Templeton Global Advisors Limited or other sub-distributors, intermediaries, dealers or professional investors that have been engaged by Templeton Global Advisors Limited to distribute shares of Franklin Templeton funds in certain jurisdictions. This is not an offer to sell or a solicitation of an offer to purchase securities in any jurisdiction where it would be illegal to do so.

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THE CASE FOR EMERGING MARKETS INVESTMENTS · Emerging markets are exciting, dynamic and in the hands of skillful investment managers, have the potential to be very profitable— a