By Dr. Mark Mobius, Executive Chairman, Templeton Emerging Markets Group
Concerns of a wider debt crisis in the Euro zone resurfaced in November as Ireland accepted emergency financial aid. Despite a
US$113 billion bailout package by the European Union (EU) and International Monetary Fund (IMF), investor confidence remained
fragile on expectations that Portugal and Spain could also require financial support. Ireland became the second EU country, after
Greece, to receive emergency funds from the IMF and EU. In Asia, the G20 summit was held in South Korea, where world leaders
pledged to continue efforts to ensure strong and sustainable growth, job creation and global demand. On November 23, North Korea
and South Korea engaged in an artillery duel near their borders, sparking off a fresh round of tensions on the Korean Peninsula. The
correction in equity prices was short-lived as investors focused on the long-term opportunities and prospects. Within this
environment, emerging stock markets declined, with the MSCI Emerging Markets index ending November down 2.6% in US$ terms,
in part due to weaker emerging market currencies.
The People’s Bank of China continued to focus on cooling lending and curbing inflationary pressures in November. The Bank raised
the reserve requirement ratio to 18.0% from 17.5% for large banks, and 50 basis points (0.5%) to 14.5% for small and medium-sized
lenders. The consumer price index rose to 4.4% y-o-y in October, its highest level in more than two years. Aimed at improving
bilateral relations, China and Cambodia signed agreements worth US$6.4 billion in areas such as infrastructure, energy and
telecommunications. In addition, China also pledged to increase trade and investment with Poland and promote bilateral relations
with Chile, Botswana and Oman. China’s trade surplus widened to US$27.1 billion in October, from US$16.9 billion in September.
Exports and imports continued to record double-digit growth.
The Bank of Korea raised its key interest rate by 25 basis points (0.25%) to 2.5%, as part of efforts to control inflation. Consumer
prices rose 4.1% y-o-y in October, exceeding the Bank’s target range. Concerned about strong capital inflows and currency
appreciation, the government may impose a 14% withholding tax on local bond investments held by foreigners. On November 23,
North Korea and South Korea engaged in an artillery duel near their borders, sparking off a fresh round of tensions on the Korean
Peninsula. This was the first artillery attack on the South’s territory since the war in 1950 and the attack included fatalities to South
Korean civilians. However, the crisis is unlikely to escalate further as we do not believe that North Korea has the capability to
implement and maintain a war. As for the impact on the stock market, past incidents that have resulted in stock market corrections
were short-lived. Thus, we believe it should not be any different this time.
The Indian economy grew 8.9% y-o-y in the third quarter of 2010, exceeding market expectations and slightly ahead of the 8.8% y-oy
growth in the previous quarter. Key drivers included strong growth in manufacturing and construction. The Reserve Bank of India
maintained a tightening monetary policy with the announcement of a 25 basis points (0.25%) increase in the repo and reverse repo
interest rates to 6.25% and 5.25%, respectively, in an effort to curb inflationary pressures. The wholesale price index remained stable
at 8.6% y-o-y in October. India’s trade sector continued to record strong growth with exports and imports recording double-digit
growth. In September, exports were up 23.2% y-o-y to US$18.0 billion, while imports grew 26.1% y-o-y to US$27.1 billion. This led
the trade deficit to narrow to US$9.1 billion, from US$13.0 billion in August. U.S. President Obama visited India where he announced
a loosening of U.S. trade restrictions with the country. Export agreements totaling about US$10 billion were also disclosed.
Brazil remained an attractive foreign investment destination with foreign capital inflows into mergers & acquisitions totaling US$27.5
billion in the first nine months of the year. This accounted for 32.9% of the total flows into Brazilian mergers & acquisitions,
significantly higher than the US$5.2 billion in the first nine months of 2009. The consumer price index rose to 5-month high of 5.2% yo-
y in October, from 4.7% y-o-y in September, remaining above the Central Bank’s year-end target of 4.5%. Higher food and
beverage as well as fuel costs were the key culprits. President-elect Dilma Rousseff revealed details of her future economic team.
Finance Minister Guido Mantega would remain in his position while the Deputy Governor for Financial System Regulation and
FRANKLIN TEMPLETON INVESTMENTS EMERGING MARKETS NEWSLETTER 2
Organization, Alexandre Tombini, would take over as Central Bank Governor in 2011. As such, continuity in the current policies
implemented by President Lula’s administration can be expected.
South Africa’s GDP grew 2.6% q-o-q in the third quarter of 2010, slightly slower than the revised 2.8% q-o-q growth in the preceding
quarter. The mining & quarrying sector was a significant contributor to growth. The South African Reserve Bank maintained an
expansionary monetary policy in November. The Bank reduced its key benchmark interest rate by 50 basis points (0.5%) to 5.5%.
Inflation remained at its lowest level in more than four years and within the Central Bank’s target range of 3% to 6%. Consumer
prices rose 3.2% y-o-y in September. South Africa ranked first place in the Open Budget Index, which assesses fiscal transparency
and accountability across 94 countries. The index is compiled every two years by the International Budget Partnership.
GDP growth in Russia slowed significantly to 2.7% y-o-y in the third quarter of 2010, from 5.2% y-o-y in the second quarter.
In addition to weak export growth, droughts and wildfires adversely impacted the agricultural, industry and retail sectors. The Central
Bank left its benchmark interest rate unchanged at a record low of 7.75% for the sixth consecutive month to support the economy
and curb inflationary pressures. Consumer prices rose 7.5% y-o-y in October, its highest since January, mainly due to higher food
prices. This compared to an increase of 7.0% y-o-y in September. Industrial output grew 6.6% y-o-y in October, exceeding market
expectations, partly due to the mining & quarrying sector.
International credit rating agency, Fitch upgraded its outlook on Turkey’s BB+ long-term foreign and local currency debt rating to
positive from stable, due to the country's strong economic recovery and improving fiscal position. This followed a similar upgrade by
Moody’s in October. The Central Bank left its one-week repo rate unchanged at a record low of 7.0%. However, the Bank reduced
the overnight borrowing rate by a much larger 400 basis points (4.0%) to 1.75% to encourage interbank lending. Additionally, the
reserve requirement ratio for banks’ Lira liabilities was increased by 50 basis points (0.5%) to 6.0%. The consumer price index eased
to 8.6% y-o-y in October, from 9.2% y-o-y in September.
FEATURE OF THE MONTH: REFRESHER - “THE DOS AND DON’TS OF EMERGING MARKET INVESTING”
While there is no simple secret that will guarantee constant investment success, here are some tips that can help improve your
If you choose to put all your eggs into one basket, there is a very real risk that you may choose the wrong basket. To reduce this risk,
one needs to diversify. The more diversified a portfolio is, the better protected it is against unexpected events, natural disasters,
dishonest management as well as investor panic. Moreover, global investing across all sectors is always superior to investing in only
one market or industry. If you search worldwide, you will find more bargains and better bargains than by studying one nation. You
never want to be overly dependent on the fate of any one stock, market or sector.
2. Take a long-term view - investment averaging helps
It is important to take a long-term view of markets. This will enable you to see beyond the short-term volatility of the market, and
invest based on observations of valuations, political stability and the economic health of countries. By looking at the long-term growth
and prospects of companies and countries, particularly those stocks, which are out of, favor or unpopular, the chances of obtaining a
superior return are much greater. There would also be significant savings on unnecessary transaction costs.
To minimize discomfort or disappointment in the short-term, investment averaging could be undertaken by purchasing consistently in
a measured and periodic pattern. Investors who establish a program from the very beginning to purchases shares over a set period
of time have the opportunity to purchase at not only high prices, but also low prices, bringing their average cost down.
3. Accept market cycles - make volatility your friend
Make volatility your friend. Any study of stock markets around the world will show that bear or bull markets have always been
temporary. It is clear that markets do have cyclical behavior with pessimistic, skeptical, optimistic, euphoric, panic and depressive
phases. It is this volatility that gives investors the opportunity to sell high and buy low since the manic-depressive nature of markets
means that they will rise much more than they should and fall much more than should as well. Investors should thus accept market
cycles and plan accordingly.
FRANKLIN TEMPLETON INVESTMENTS EMERGING MARKETS NEWSLETTER 3
4. Don’t follow the crowds - be independent
A number of successful investors have commented on the importance of independence and individual decision-making. If one buys
the same securities as other people, one ends up with the same results as others. It is impossible to produce a superior performance
unless one does something different from the majority.
5. Don’t try to time the market
The reality is that market timing is impossible, and since equity investing is the best way to preserve value, rather than leaving
money in a bank account, it is best to just get going, rather than wait for the fabled perfect moment. The best time to invest is when
you have the money and are convinced that value exists from a long-term point of view. A corollary to the question of when to buy is,
of course, when to sell. My feeling on that issue is that investments should not be sold unless a much better investment has been
found to replace it.
6. Don’t get sentimental or attached
It is important to be objective and flexible. This allows an investor to distinguish between poor fundamentals and poor sentiment as
well as make investment decisions on the basis research and not emotions. Often it is in times of poor market sentiment that we find
investments with strong fundamentals at attractive prices. Bring flexible keeps one from holding on to a stock out of loyalty – it allows
one to change as times change and new circumstances present themselves.