Investment Adventures in Emerging Markets

Turkey is the land where the European and Asian continents meet. I asked Carlos von Hardenberg, who is based in Istanbul and oversees our frontier market strategies, to share his views from the center of Eurasia.

From Carlos von Hardenberg

Turkey is a dynamic country with over 73 million inhabitants, of which 75% live in cities with a median average age of 29 years.[1]Turkey has developed into a popular destination for investments not only because of its competitive export sector, particularly in automobiles and consumer goods, but also because of its large domestic consumer market. Now Asian, European and American consumer-oriented companies are moving into Turkey to capture this large and growing consumer market.

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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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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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By Claus Born, Senior Executive Director, Templeton Emerging Markets Group

At the end of November 2010, Chile, Colombia and Peru are planning to integrate their stock exchanges, providing local investors with more investment opportunities and also allowing companies to access a broader investor base. We are likely to see increased foreign investor participation with improved liquidity. Once fully integrated, this new regional exchange should have the highest number of issuers in Latin America (before Mexico and Brazil), the region’s second-largest market capitalization (after Brazil) and its third-largest trading volume (after Brazil and Mexico).

Year to date, equity markets in Chile, Colombia and Peru returned 38.8%, 60.2% and 52.6% respectively[1], outperforming the larger equity markets of Brazil and Mexico, which rose by 4.7% and 18.3% respectively.[2]

Chile

Two major events brought the small Andean country worldwide media coverage this year. The most recent was the spectacular rescue of a group of miners trapped underground for more than two months. Chile’s newly elected President Sebastian Piñera was among the first to greet the miners when they came out of the ground. And earlier this year, a devastating earthquake with a magnitude of 8.8 struck the country, the seventh-strongest earthquake ever measured worldwide. While many were rescued from the rubble and the number of survivors was high, the total damage is estimated to reach about 15% of the country’s GDP.[3]

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While Latin America has come a long way in the last decades consolidating its political democratic system and achieving economic stability, there is a strong need for infrastructure and other investments to sustain a healthy level of growth. The region has developed a unique profile to attract a highly-diversified investor base. We are seeing a large and young population moving up rapidly to the new “consumer” middle class, but at the same time having one of the lowest loan penetrations in the world. The rise of this consumer middle class and growth in per capital GDP is resulting in an increase in domestic spending, which drives the domestic economy. Secondly, the region has vast resources available at low cost.

Opportunities from this new consumer middle class has led to an increase in demand for products and goods in general and all types of infrastructure investments. As global demand for commodities continues to trend up, its large natural resource base helps to support the region’s fundamental long-term growth. One key concern we have is the lack of increased productivity over a long-term period.

Brazil and Argentina have been leading Latin American growth, and the region has been one of the top performing emerging markets in the third quarter of this year.[1] There have been some major changes on the Latin America geopolitical scene over the past few weeks. Argentina mourns the passing of former president Nestor Kirchner, who was expected to run in the 2011 election, while Brazil celebrates the victory of its first female president, Dilma Rousseff. In other parts of the region, we have Chile, Colombia and Peru planning to integrate their stock exchanges at the end of November this year, providing local investors with more investment opportunities.

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We just had our semi-annual analyst conference in Romania last month, and given our proximity to Russia, the giant in Eastern Europe, that was naturally a topic for discussion. Here, Gennady Zhilyaev, our Russia-based investment analyst, shares some of his personal insights on the country.

By Gennady Zhilyaev, Deputy Director, Templeton Emerging Markets Group

Russia is the world’s biggest exporter of natural gas and the second-biggest exporter of oil.[1] It is also the third-largest exporter of steel and primary aluminum.[2] However, it was one of the hardest-hit countries during the recent global economic crisis, largely due to its huge dependence on commodity prices. Oil prices plummeted and rating agencies lowered their credit ratings on several Russian banks, while the country’s GDP shrunk by 7.9% in 2009 and stock prices plunged significantly from their peak.[3] The government had to recapitalize the banking system and bail out several large state companies, thus putting further pressure on its own finances.

Many companies are still reeling from the aftermath. Some media reports indicated that the number of Russian companies that filed for bankruptcy rose by 15% in 2009, but I believe that correlates with the recent economic downturn, and it follows a global trend.[4] During the thriving years of economic growth, we saw many start-up companies emerge, flourishing in a very favorable environment. However, tested in challenging times, some companies’ business models turned out not to be viable and failed to see them through.

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By Tom Wu, Senior Managing Director, Templeton Asset Management, in Cebu, Philippines

With Tom Wu

Following my colleague’s post on the BRIC economies a couple of weeks ago, it’s worth noting that our global emerging markets strategy includes investments in over 20 emerging economies. As bottom-up investors who look at companies on a stock-by-stock basis, there are opportunities and bargains in many of these markets which might not appear on most investors’ radars.

During the Templeton emerging market team’s conference in Cebu last month, we discussed a number of these opportunities. Today, I’ll focus on two countries – Turkey and Hungary, which we believe are trading at attractive price-to-earnings and price-to-book ratios.

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With Dennis in Sri Lanka

A key component of the Templeton Emerging Markets Team’s investment process is peer review and evaluation. We held our semi-annual group conference last week in Cebu, Philippines. Aside from our weekly review meetings over the phone, this is one of the two times a year when the entire Templeton Emerging Markets investment research team gathers together in the same place to discuss portfolio-related themes, and to assess and evaluate our resources and internal efficiencies. As mentioned, peer review and evaluation is one of the main things we focus during our global gathering.  

I’ve asked two of our most experienced and long standing portfolio managers to contribute their thoughts for the next two blogs. Dennis Lim and Tom Wu are both pioneers with the group and started our two largest research offices in Singapore and Hong Kong, respectively.  

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Thank you for returning to read my blog. This time, instead of hearing from me, you will be reading the thoughts of a member of the Templeton Emerging Markets team – Sven Richter is a portfolio manager and has been with the team for almost 15 years. He is based in Johannesburg, South Africa, and I asked him to write on my behalf this week. Sven represented our team at a client conference hosted by Franklin Templeton Investments in Vienna last week to discuss global investment themes and trends, and here are his observations from the trip:

By Sven in Vienna

I have been to Vienna about half a dozen times, and I was also lucky enough to live here for a period. The weather for the event was rainy, which was a pity for many of our clients who had never seen the beautiful city of Vienna, but what  impressed me most was the high level of interaction from the clients at the event. They were very knowledgeable and asked many interesting and thought-provoking questions.

I was on a panel discussion on opportunities in the emerging markets equity and fixed income space. With my colleagues from the Franklin Templeton Fixed Income Group, we identified two main themes. We are still finding opportunities to invest and still see attractive upsides for the stocks that we select.

Firstly — in our view, the opportunity for finding stocks and fixed income investments today has moved to a stock-specific and bond-specific level. Markets are not cheap as a whole compared to where they were a year ago, but we are still finding opportunities to invest. We have to use our research and knowledge to find the right investment.

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