Investment Adventures in Emerging Markets

In front of The Casa Rosada, Buenos Aires, Argentina

We had four new team members from Asia attending our semi-annual analyst conference in Buenos Aires, Argentina, this month. We have recently expanded our research team covering Asia and opened our 17^th research office in Bangkok, Thailand, last September. I asked Allan Lam, one of the pioneers who started the Emerging Markets Team with me in 1987, for his personal insights on the changes in Asia.

By Allan Lam

The new Asia analysts reminded me of myself when I joined Franklin Templeton’s first emerging markets research office in Hong Kong. Asia has evolved tremendously over the past two decades. Back in 1988, Asia (excluding Japan) only accounted for 2.7% of the world’s total market capitalization, now it’s 21.7% as of December 2009.[1]

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At the Kingdom of Dreams

Throughout my travels, I have visited some countries that never cease to amaze me every time I go back, and India is definitely one of them. The country is changing and growing at an incredible pace. In 2010, India’s economy grew by 9.7%, and for 2011 the International Monetary Fund projects GDP growth to be 8.4%.[1] However, many people do not realize that this fast pace of growth is not new and looks to be steady going forward. From 2005 to 2010, India’s economy grew around 6% to 8% each year, an impressive feat for such a large economy.[2] Looking ahead, from 2011 to 2030, EIU forecasts GDP growth to average 6.5% a year, which would make India the fastest-growing large economy in the world during that period.[3]

Some of the key drivers for India’s strong growth include rising per-capita income levels, robust domestic demand, more consumption from a growing middle class, and favorable demographics in terms of an increasing working-age population. We try to capture some of this growth through our investments in Indian companies, with an emphasis on commodities as well as consumer products and services.

India’s swift pace of growth means that consumption of commodities is rising fast, and the most crucial commodities are those that produce energy: oil and gas. It is a challenge for India to meet expanding energy demand, since it has less than 0.5% of the world’s oil and gas reserves but is home to 15% of the world’s population.[4] [5] By 2025, India is likely to become the fourth-largest net importer of oil in the world, behind the United States, China, and Japan.[6] An intensive search is underway — oil and gas has been discovered both onshore and offshore, which is a great boon for a country so dependent on oil imports. The search for energy is not limited to oil and gas but also extends to coal, wind and solar-powered sources.

On each visit to India, I’m astounded by the vibrancy of the consumer market, with the opening of new malls, hotels and apartment blocks, as well as an avalanche of advertising on television, billboards, movie theaters and every other conceivable advertising medium. A key driver of the rapid changes taking place in India is telecommunications—almost 706.7 million out of the total population of 1.17 billion Indians own cell phones.[7] [8]

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Background: Widespread protests have been ongoing in Egypt since Tuesday, January 25, 2011. Sparked by the protests in Tunisia, now known as the “Jasmine Revolution,” the demonstrations in Egypt were initially focused on the perceived unfair parliamentary elections held in November 2010, and have subsequently expanded rapidly in size and scale, with many demanding the resignation of President Hosni Mubarak and a complete change of the National Democratic Party (NDP) regime. While the overall thrust of the demonstrations was peaceful, they have recently become turbulent with some incidents of violence such as the torching of the NDP party headquarters and more recently with clashes between protestors and those supporting the current government. The deployment of the army initially restored security somewhat, as the military is well liked and respected by most Egyptians. Importantly, the army has so far refused to engage with protestors but still managed to protect key political assets.

Government Response: In response to the protests, last weekend President Mubarak dissolved his cabinet and made two notable appointments—Ahmed Shafiq as prime minister and Omar Suleiman as vice president. Mr. Shafiq, previous civil aviation minister and former head of the air force, is respected by the Egyptian elite, even among the political opposition. He is viewed as a moderate with strong business credentials and a military background, and he has been credited with the turnaround of EgyptAir. Mr. Suleiman, former head of military intelligence, led Egypt’s efforts in securing an Israeli-Palestinian peace deal and mediated an inter-Palestinian reconciliation.

Nominating Mr. Suleiman as vice president represents a first step taken by Mr. Mubarak toward laying the foundation for a succession plan to his 30 years of presidential rule. The appointments are not only seen as the first step in the process to end Mr. Mubarak’s presidency but also signal a shift toward a more liberal political system. Mr. Mubarak also stressed the need for political reform and promised that his new government would control inflation, maintain subsidies, fight corruption and create jobs. Meanwhile, the speaker of the Egyptian parliament indicated that an investigation would be launched into the legality of last November’s parliamentary elections.

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With Greg at the opening bell ceremony on the day Fondul was listed on the Bucharest Stock Exchange

Nearly four months ago, I wrote about the opening of our office in Bucharest to manage the mandate for Fondul Proprietatea (Fondul). If you remember, Fondul was established to compensate Romanians whose properties were confiscated by the former communist government. Since then, Grzegorz Konieczny, fund manager of Fondul, moved to Bucharest and has spearheaded the effort to list Fondul on the Bucharest Stock Exchange. I asked him to share his thoughts on Bucharest and what the listing means for shareholders and the Romanian market.

From Greg Konieczny

My first trip to Bucharest was in 1997. At that time, the city’s infrastructure was not in the best shape, very few people spoke English, and on the roads, the majority of cars I remember seeing were the domestically produced Dacia, named after the historic region that constitutes much of present-day Romania. However, I have since visited Bucharest many times and have seen considerable change taking place. The city’s infrastructure has improved significantly, with better roads and airports and a great choice of hotels and restaurants for visitors. The Dacia has now been edged out by luxury cars from all over the world—in fact, there appear to be more of those cars in Bucharest than in the capitals of other countries in the region. All these changes seem to indicate that Romanians are gradually benefiting from the arrival of a market economy in this former communist country.

To me, one of the clearest symbols of a market economy is the stock exchange. The Bucharest Stock Exchange (Bursa de Valori Bucureşti or BVB) was inaugurated in 1882, but it was closed when the communist regime took power after World War II. In 1995, the exchange reopened, listing only six companies and holding just one weekly trading session. Less than 10 years later, by the end of 2004, things had changed quite a bit—with more than 70 listed companies and regular daily trading, the market’s capitalization stood at US$12 billion, about 17% of Romania’s GDP. Unfortunately, this impressive start was not followed by additional listings of large state-controlled companies, and the BVB did not grow substantially thereafter. At the end of 2010, the BVB’s market capitalization was US$13.7 billion (about 8.5% of estimated 2010 GDP), not much higher than levels in 2004.[1]

In addition, like many other eastern European markets, the BVB was impacted by the effects of the global financial crisis in late 2008. Average daily trading volumes on the exchange, after peaking at US$22.7 million in 2007, decreased to US$6.9 million in 2010. Much of this decline might have been due to the reduced trading activity of foreign investors during this period, who went from representing about 37% of total traded volume on the BVB in 2007 to about 25% in 2010. Although the BVB is dominated by residents, foreign investors play an important part as trend setters.[2]

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