Middle Class Expansion in the Emerging Markets

Presented by:Rob Lutts, President & CIO

Tim Moore, CFA, Portfolio ManagerDennis Wassung, CFA, Portfolio Manager

CHINA VS. UNITED STATES

Presented by: Robert T. Lutts, President & Chief Investment Officer

United States versus China

TAX POLICY IN USA– U.S. corporate tax

high– City, State and

Federal sales tax, capital gains, social security tax, dividend tax and more

– We are not undertaxed

TAX POLICY IN CHINA– Very immature tax

policy– No real estate taxes– Low corporate taxes– Low income taxes– No social security

tax, only modest obligations

United States versus China

US Debt Burdens

Large and Growing

• US has debt close to 90% of GDP

• Off balance sheet obligations of Social Security and healthcare could be larger than $14 trillion debt

• US attitudes toward debt are excessive

• So, US debt could be 2X GDP

China Government

Finances are Strong

• Total government debt is much less than US – estimates around 40% of GDP

• Average Chinese citizen avoids debt

• Foreign Exchange Reserves are over $3 trillion

• China has flexibility

Incentives for Entrepreneurs are High

• High rewards and much wealth are there for those who take risk in growing capital.

• Government policy encourages capital investment.• Tax policy is favorable for investment.• Infrastructure costs are low in China.• Cost structure still very favorable for all businesses to

move operations to China. Two reasons:1. Lower costs

2. Enlarge potential markets

China and Many Other Emerging Markets Favorable for Capital Growth

• Over past ten years, Emerging Markets outperformed developed markets by 10% per year.

• We anticipate this to continue once money comes back to equity markets.

• China will eventually open up its currency, and this will help China grow – fully convertible currency.

• China continues to take advantage of global opportunities – buying in Brazil, Greece, and other troubled areas.

EARLY INNINGS AND MYTHBUSTERS

Presented by: Tim Moore, CFA, Portfolio Manager

Early Innings of Growth• Young Stages of Urbanization & Localization of

Brands, Services, Products. Vast “Window of Opportunity” ahead.

• Middle Class = 2b people w/ $7 trillion annual spending could reach $20 trillion in 2020 (2x that of US today).

• EM Population living in cities might grow +45% next 20 years.

• GDP growth of EM is 3x that of Developed Markets for 2011 & 2012 expectations (+6% vs 2%).

• Not just an “outsourcing” region anymore. They are developing their own technology and innovating.

Myth versus Reality

Myths• It is a lot of people, but

not much economic growth

• Only speculators or risky people invest there!

• Those countries have so much debt!

• Their stocks do not perform better than Developed countries

• Currency is too volatile

Reality• EM is 55% of world’s GDP

growth and 45% of GDP but only 17% of World Mkt Cap

• EM had record $95b inflow in 2010 for Equities

• EM has the least amount of Debt/GDP of any region

• EM stocks outperformed US (S&P 500) by 12%/year on average over last 10 years

• Broad basket of EM nations reduces Currency Risk

“Catch-Up” Spending to Accommodate the Middle

Class

China is 60% of this $6 trillion expected spending 2010-2013

Broadening Offerings

What Else?• Credit Cycle, Urbanization & Home Purchasing

affects ALL industries. “Halo Effect” lifts growth of Retail, Construction, Energy Needs, Infrastructure, Banking, Healthcare.

• Multinational Companies only average 11% of sales exposure to EM (highest are Nokia, Nike, Suzuki, Hyundai, Boeing, Anheuser-Busch, Philip Morris Intl).

• Much better accounting practices & disclosures today.

• Supportive valuations of stocks along with dividends.

• Strong balance sheets and raising rates to curb inflation.

TRANSITION FROM “MADE IN CHINA” TO “CONSUMED IN CHINA”

Presented by: Dennis Wassung, Jr., CFA, Portfolio Manager

Emerging Markets Middle and Upper Class to Surpass Developed Markets

by 2015

6% of 2000 EM population, growing to 22% in 2020

Emerging Markets Consumption is

Growing on a Global Scale

China and India Consumption Data

Consumption Spending Breakdown

China’s Auto Market Is Now World’s Largest

10-Year Compound Growth of 24% -- 2M to 18M units!

China Healthcare Industry10-Year Compound Growth of

~16%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010$0

$50

$100

$150

$200

$250

$300

$350

4.0%

4.1%

4.2%

4.3%

4.4%

4.5%

4.6%

4.7%

4.8%

4.9%

5.0%

China Healthcare Expenditures (US$, billions)% of GDP (RHS)

No Longer Just “Made in China”

• China is now estimated to be the world’s largest consumer of luxury goods – with 22% share of the 2010 global market @ $13 billion (overtaking Japan)

• China’s Retail Sales of Consumer Goods growing 17% versus GDP growth of about 9.5%

• China’s Automobile Sales topped the U.S. in 2010, becoming world’s largest car market

• World’s largest Internet user population, leading to growing eCommerce industry