Templeton Frontier Markets

7/30/2019 Templeton Frontier Markets

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Emerging Markets Overview

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By Dr. Mark Mobius, Executive Chairman, Templeton Emerging Markets Group

Overview

Emerging markets ended April with a 3.1% return in USD terms. Stronger

domestic currencies and higher commodity prices further supported

performances. Fund flows into emerging market funds turned positive in April,

after two consecutive months of net outflows. Inflation, however, remained a

concern for many countries. Central Banks in major emerging markets such as

China, India, Brazil and Russia continued to implement tightening monetary

policies to curb inflationary pressures. Asian markets were the top performers in

April. Thailand, Taiwan and South Korea outperformed, while India, China andMalaysia were on the other end of the spectrum. Latin American markets

recorded mixed performances with Chile, Colombia and Mexico ending the

month with positive returns. In Europe, Turkey, Poland, Hungary and the Czech

Republic recorded double-digit gains.

Regional Update

Asia

The Chinese economy grew 9.7% y-o-y in the first quarter of 2011, in line with

the 9.8% y-o-y growth in the final quarter of 2010. Key growth drivers included

trade and investment. In an effort to curb liquidity and inflation, the Peoples Bankof China raised its one-year deposit and lending interest rates by 25 basis points

(0.25%) to 3.25% and 6.31%, respectively, in April. This was the Banks second

increase this year. The reserve requirement ratios were also increased by 50

basis points to 20.5% for large banks and 18.5% for smaller banks. Inflationary

pressures remained high, with consumer prices rising 5.4% y-o-y in March,

compared to an increase of 4.9% y-o-y in February. An attractive foreign

investment destination, foreign direct investment (FDI) inflows surged 32.9% y-o-

y to US$12.5 billion in April. This compared to a 29.4% y-o-y jump to US$30.3

billion in the first quarter of 2011. Brazilian President Dilma Rousseff visited

China in April, where both countries entered into a number of cooperative,

economic and investment accords in areas such as energy, agriculture, defense

and technology

South Koreas GDP grew 4.2% y-o-y in the first three months of 2011, due to

strong exports and recovering domestic demand. This was, however, lower than

the GDP growth of 4.7% y-o-y in the last quarter of 2010, mainly due to a decline

in investment. The Central Bank expects the economy to grow 4.5% y-o-y in

2011. Inflationary pressures remained high, with the consumer price index

reaching its highest in more than two years, as a result of higher oil and food

prices. Consumer prices rose 4.7% y-o-y in March, slightly higher than the 4.5%

y-o-y increase in February. The Central Bank, however, left its key interest rateunchanged at 3.0% in April, after a 50 basis points (0.5%) increase in the first

quarter. Aimed at boosting trade and economic relations, South Korea and Peru

finalized a free trade agreement in March.


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F R A N K L I N T E M P L E T O N I N V E S T M E N T S EMERGING MARKETS OVERVIEW 2

Industrial production growth in India moderated to 3.6% y-o-y in February, from 3.9% y-o-y in January, mainly due to a

decline in capital goods production. Consumer durables production, however, remained robust with a growth of 23.4% y-

o-y. Inflation remained a major concern, with wholesale prices rising 9.0% y-o-y in March, compared to an 8.3% y-o-y

increase in February. This raised expectations for an increase in interest rates by the Reserve Bank of India next month.

While high oil and food prices remained the key culprits, food inflation did ease to 9.5% y-o-y in March, from 10.7% y-o-y

in February. The Bank has raised rates eight times since 2010 to curb inflation. The trade sector continued to record

strong growth with exports jumping 49.7% y-o-y in February, and imports increasing 21.2% y-o-y.

Latin America

In Brazil, domestic demand remained robust, with retail sales increasing 8.2% y-o-y in February. This was in line with the

8.3% y-o-y growth recorded in January. Consumer prices rose 6.3% y-o-y in March, due to higher food and transport

costs. This was just under the Central Banks target range of 2.5%-6.5%. The Bank subsequently rose its key interest rate

by 25 basis points (0.25%) to 12% in April, to curb inflationary pressures. This was the Banks third rate increase this

year. In an effort to increase greater trade and investment relations as well as regional security, U.S. President Barack

Obama met President Dilma Rousseff during his visit to Brazil in March. A number of bilateral agreements in areas such

as trade and air transportation were also signed. Moreover, President Dilma Rousseff visited China in April, where both

countries signed a number of cooperative, economic and investment accords in areas such as energy, agriculture,

defense and technology.

Africa

South Africas budget deficit declined to 5.1% of GDP for the fiscal year ended March 2011, from 6.8% of GDP in the

previous year. The trade balance recorded a surplus equivalent to 0.6% of GDP in the fiscal year 2010/2011. In March,

exports jumped 31% y-o-y, while imports were up 26% y-o-y. As a major exporter of gold, platinum, coal and diamonds,

high commodity prices continued to support export growth. Industrial production growth rose to 6.0% y-o-y in February,

from 1.6% y-o-y in January. The consumer price index rose to 4.1% y-o-y in March, from 3.7% y-o-y in February. This

was mainly due to higher food and transport prices.

Europe

Russia reported encouraging macroeconomic data during the month. The countrys trade surplus widened to US$17.4

billion in February, from US$14.9 billion in January. Supported by high oil prices, exports rose 27.7% y-o-y to US$39.0

billion in February, while imports surged 39.3% y-o-y. Growth in retail sales increased to 3.3% y-o-y in February, from

0.5% y-o-y in January, due to stronger domestic demand. Moreover, unemployment declined to 7.6% in February, from

7.8% in January. The Central Bank raised is benchmark interest rate by 25 basis points (0.25%) to 8.25% in April, to

combat inflationary pressures. This was the Banks second increase this year. Consumer prices rose 9.5% y-o-y in March.

While Turkeys Central Bank left its key interest rate unchanged at 6.25%, it raised the reserve requirement ratio for

short-term Lira liabilities by 100 basis points (1.0%) to 16.0%. The reserve requirement ratio for short-term foreign

exchange liabilities was also raised. Deputy Governor Erdem Basci was named as the new Central Bank governor inApril. The Bank is expected to continue its current monetary policy. The consumer price index rose to its highest level this

year, as consumer confidence increased and clothing prices rose. Inflation rose to 4.3% y-o-y in April, from 4.0% y-o-y in

March. Higher inflationary pressures led the Central Bank to raise its inflation forecast for end-2011, to 6.9% y-o-y, from

5.9% y-o-y.


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Feature of the Month: Focusing on Frontier Markets

What are frontier markets?

Frontier markets are commonly used to describe a subset of emerging markets which have lower market capitalization

and liquidity than the more developed emerging markets. More importantly they are markets that have not yet been

"discovered" by the majority of investors. They are markets where there is limited research available to investors.

Frontier markets may generally be smaller and less developed than emerging markets, but they continue to experiencestrong economic growth and maintain a low debt-to-GDP ratio. They are where many emerging markets were 20 years

ago. In the future, we expect these markets - at least some of them - to become quite important and to eventually become

full-fledged emerging markets.

What is your rationale for investing in them and what's the essence of your investment strategy?

Economic growth in many frontier market countries remains high and is even faster than some emerging markets and

exceeds the growth in developed markets by a wide margin. The growth is not only economic growth but also growth in

capital markets. Some of these markets are moving from small and illiquid status to large and liquid.

Many frontier countries are also leading producers of oil, gas and precious metals, and they are well positioned to benefit

from the high global demand for these resources. Additionally, as the economies of frontier market countries expand, theycontinue to increase investments in infrastructure, offering valuable opportunities in the construction, transportation,

banking and finance and telecommunications industries. Rising consumption provides these economies with strong

purchasing power and the ability to spend their way into growth. Moreover, frontier market countries have been, and

continue to be, positively impacted by the substantial investments made by large emerging market countries such as

China, India, Russia and Brazil.

The economic drivers across frontier markets are diverse. For example, Botswana, one of the worlds largest diamond

exporters, is introducing call and data processing centers. On the other hand, Kazakhstan, a country rich in oil and other

natural resources, is seeing significant investments in infrastructure development. These varied economic themes across

frontier markets ensure a diversified portfolio.

And why should investors care about frontier markets? Aren't emerging markets already risky enough?

Frontier markets are actually not more risky than emerging markets or developed markets. Although there are a lot of

uncertainties because of the general lack of knowledge among investors who don't have the resources to study those

markets, the actual risks are not significantly different from other markets. Although individual markets can be

volatile, combined in a diversified portfolio they could be less volatile than a portfolio of developed market stocks.

How does the disaster in Japan (and potential slower growth from Japan), as well as the turmoil in Middle East,

factor in one's analysis of frontier markets?

The Japan and Middle East situations are not having any more impact on frontier markets than any other markets around

the world. Of course, in the case of some of the Middle East markets there has been some volatility. However, the wide

range of frontier markets going from places like Nigeria, to Vietnam and Ukraine means that events in, say, Egypt, will nothave much impact on the other markets.

In fact, we continue to invest in Middle East companies that we believe will survive the current turmoil and prosper over

the next five years. Generally speaking the "information revolution" where people of all walks of live and in every

economic status can communicate quickly and efficiently with cell phone and through the internet means that it will be

more and more difficult for corrupt and dictatorial regimes to survive. This is quite beneficial for the development of capital

markets and particularly stock markets so we are quite optimistic regarding the Middle East. Emerging markets growth

rates and per capita income are moving up at a rapid pace. As foreign reserves in these countries reach sky-high levels,

and their safety profile continues to improve, perceptions about emerging markets also continue to improve. People are

beginning to realize theyre not as risky as they seem. Moreover, theres quite a lot of value in emerging markets, because

earnings growth is keeping up at a rapid pace, so we still are finding opportunities.


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Do events such as the instability in the MENA region make investing during these volatile times more

attractive? Or simply more dangerous?

If you have good research on the frontier market companies, volatility can be very good since with panic selling prices can

come down temporarily to very low levels enabling the patient and knowledgeable investors buy stocks cheaply.

What are the challenges of investing in frontier markets and how do you try to circumvent them?

While frontier markets offer a potentially attractive investment opportunity, an array of challenges also exists. Examplesinclude poor information flow, illiquid stocks and sudden government policy changes. Frontier markets are subject to

additional, heightened risks due to a lack of established legal, political, business and social frameworks to support

securities markets. Relying on seasoned international fund managers who have demonstrated knowledge in navigating

through these relatively new and volatile markets is essential.

Our emerging markets team has over 40 investment professionals working from offices in 17 locations. In employing

Templeton's ground-up investment approach, our local analysts are able to address such issues because they not only

understand the local languages and culture, but they get to know the companies and the market environment by meeting

with company management teams, understanding the impact of local regulations, and talking with local customers and

competitors. Frontier market investing often requires additional time and due diligence to assess the quality of the

management team including more frequent on site visits to evaluate the business effectively.

Which countries and sectors in frontier markets look interesting?

We do not favor any particular market but select stocks which are the most attractive across all markets. A look at the

breakdown of our frontier market funds country investments will show where we are finding the most bargains at this

stage. Currently, our largest exposures are to Nigeria, Saudi Arabia, Egypt, Vietnam, Kazakhstan, Qatar, Ukraine and

Argentina. Liquidity is the key concern for most investors, so markets that are the most liquid could attract greater

investment flows.

In terms of sectors, our focus has been on what we refer to as the two Cs: consumers and commodities. Middle class

expansion and the deceleration of population growth has triggered rising per capita income and increasing demand for

consumer products. This in turn has led to positive earnings growth outlook for consumer-related companies. We look for

opportunities not only in areas related to consumer products, such as automobiles and retailing, but also consider

services such as finance, banking and telecommunications. Commodities can offer another way to access the high growth

trajectory of nations like China and India and take advantage of greater demand. We are look for companies that are

strong producers of commodities such as oil, iron ore, aluminum, copper, nickel and platinum. While infrastructure

development in emerging markets has led to continued demand for hard commodities, demand for soft commodities such

as sugar, cocoa and select grains has also increased. Resource-rich countries in Latin America, too, are benefiting from

increasing global demand.

How can investors get exposure frontier markets?

The best way for retail investors to get exposure to frontier markets is to purchase a frontier markets fund. We have two

major frontier markets funds. The total assets in our frontier markets funds has grown to about US$1.5 billion, probably

making us the largest frontier markets investor. Trying to invest directly for an individual market is simply not practicalsince access too many of the markets is complex and expensive for the individual.

Opinions expressed in this article are their author's at the publication date. They are likely to be modified without prior notice and do not necessarily

represent Franklin Templeton Investments' point of view. Such opinions are provided to you incidentally. They do not constitute or form part of legal or

tax advice or an offer for shares or an invitation to apply for shares of the SICAV Franklin Templeton Investment Funds. Collective Investment Schemes

in Securities (CIS) are generally medium to long term investments. The value of participatory interests may go down as well as up and past performance

is not necessarily a guide to the future. Fluctuations or movements in exchange rates may cause the value of underlying international investments to go

up or down. CIS are traded at ruling prices and can engage in borrowing and scrip lending. A schedule of fees and charges and maximum commissions

is available on request from Franklin Templeton Investment Funds (FTIF). Commission and incentives may be paid and if so, would be included in the

overall costs. FTIF are priced on a forward basis and prices are calculated daily. A prospectus is available on request from FTIF. FTIF is regulated inLuxembourg and the FTIF sub-funds available for public sale in South Africa are approved by the Financial Services Board. FTIF is a member of the

Association for Savings and Investments of South Africa (ASISA).

Copyright 2011. Franklin Templeton Investments. All rights reserved.

Templeton Frontier Markets

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