Its not about the money 1 Whats Emerging in Emerging Markets The - - PowerPoint PPT Presentation

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It‘s not about the money…

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What’s Emerging in Emerging Markets The New Frontier

Nov-Dec 2011 Lawrence Speidell, CEO & CIO Frontier Market Asset Management

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Frontier Markets Have Delivered Excellent Returns

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Population 2010

Frontier 21.6% United States 5.1% EAFE 10.0% Emerging Markets 63.3%

Frontier Markets are 10% of the Combined Emerging / Frontier Total Market Capitalization – We suggest a 20% allocation

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World GDP 2009

EAFE 42.1% Emerging Markets 26.0% Frontier 6.8% United States 25.1%

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It’s about people

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It‘s about people

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It‘s about people

Bangladesh: Population 150 million 81,508 primary schools 16.5 million students 361,000 teachers (43% female) student teacher ratio of 46.

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It‘s about people

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It‘s about people

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It‘s about people

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What‘s Emerging in Emerging Markets

• What is a Frontier Market?
• History
• Rich World versus Poor World
• Stock Opportunities
• Inefficiencies
• Reasons for Optimism

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What is a Frontier Market?

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Emerging/Frontier Countries: Under $10,000 GDP/capita

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Population

http://www.worldmapper.org/display.php?selected=117

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Power Consumption

http://www.worldmapper.org/display.php?selected=117

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What is a Frontier Market?

Source: Sabastio Salgado, Workers, Gold, Serra Pelada, Brazil, 1993

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What is a Frontier Market?

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What is a Frontier Market?

Cuyahoga River 1971

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GDP per Capita (2000 $)

10 100 1,000 10,000 100,000 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

Vietnam India China Philippines Japan USA Singapore S Korea Brazil Sri Lanka Russia

ChinaGDPperCapita0901

Bangladesh Botswana

History

$192 $1791 $686

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The GUM Department Store 1991… History

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The GUM Department Store 1991… and 2002 History

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China…the Country

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Pudong

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Night Life

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Economic Growth in Frontier & Emerging Economies is High

Source: IMF, http://www.imf.org/external/pubs/ft/weo/2010/update/01/index.htm Sept 2011

GDP Growth

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Economics of Frontier & Emerging Economies are Strong

Source: IMF, http://www.imf.org/external/pubs/ft/weo/2010/update/01/index.htm Sept 2011

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Rich World versus Poor World

Source: PIMCO, February 2010

* Romania

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Rich World versus Poor World

Source: BCA, Nov 2011

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Strange New World

Source: Bank for International Settlements, ―The Future of Public Debt‖, March 2010

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Rich World versus Poor World

Note: Term structure of debt shorter than post WWII, Bonds held by Foreigners & Bond Vigilantes, not Govt, local or Passive Investors (local in Japan & Italy)

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Frontier Demographics are Favorable

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Population Demographics

2 4 6 8 10 12 14 16 18 20 10 20 30 40 50 60 % of Population Age < 15 % of Population Age > 64 Developed Markets Emerging Markets Frontier Markets Africa Japan Italy Germany Greece Bulgaria Singapore Ireland Argentina Uganda Pakistan UAE Zambia Bahrain Peru Sri Lanka Nigeria Vietnam China Source: World Development Indicators, 2007

FrontierCountries0903

Poland Romania US

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Demographics

1,000 10,000 100,000 1,000,000 10,000,000

1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050

India China Europe Russia Japan

Australia New Zealand

Population

US

• 0.4%
• 0.3%

0.3%

• 0.5%
• 0.6%

0.4% 0.1% 0.4% Source: UN Population, ChinaPop Africa 1.2%

Bulgaria

• 1.1%

2011 2025

Population Growth Rate

Bulgaria 7.7 7.1

• 0.6%

Ukraine 46.7 43.2

• 0.6%

Belarus 9.8 9.1

• 0.5%

Moldova 3.6 3.4

• 0.5%

Georgia 4.3 4.0

• 0.5%

Lithuania 3.4 3.1

• 0.5%

Russia 144.1 136.5

• 0.4%

Malawi 16.2 23.3 2.6% Occupied Palestine 4.6 6.6 2.7% Somalia 9.6 14.0 2.7% Benin 9.5 13.8 2.7% Tanzania 46.6 67.7 2.7% Burkina Faso 16.8 24.9 2.8% Afghanistan 30.2 45.1 2.9% Uganda 35.0 53.6 3.1% Niger 16.5 27.4 3.7%

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Demographics – China versus India Today

China 2011

(80,000) (40,000)

• 40,000

80,000 0-4 5-9 10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80+ 80-84 85-89 90-94 95-99 100+ Females Males

1,385,864

Population Source: United Nations Population Prospects, 2009

2011

(80,000) (40,000)

• 40,000

80,000 0-4 5-9 10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80+ 80-84 85-89 90-94 95-99 100+ Females Males

India

1,240,387

Population (000)

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2050

(80,000) (40,000)

• 40,000

80,000 0-4 5-9 10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80+ 80-84 85-89 90-94 95-99 100+ Females Males

India

1,663,998

Population

China 2050

(80,000) (40,000)

• 40,000

80,000 0-4 5-9 10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80+ 80-84 85-89 90-94 95-99 100+ Females Males

1,536,074

Population

Demographics – China versus India in 2050

Source: United Nations Population Prospects, 2009

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Demographics: Japan – Now & 2050

2011

(10,000) (5,000)

• 5,000

10,000 0-4 5-9 10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80+ 80-84 85-89 90-94 95-99 100+ Females Males

Japan

137,002

Population

2050

(10,000) (5,000)

• 5,000

10,000 0-4 5-9 10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80+ 80-84 85-89 90-94 95-99 100+ Females Males

Japan

120,721

Population

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Demographics: U.S. – Now & 2050

2011

(20,000) (10,000)

• 10,000

20,000 0-4 5-9 10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80+ 80-84 85-89 90-94 95-99 100+ Females Males

United States of America

335,705

Population

2050

(20,000) (10,000)

• 10,000

20,000 0-4 5-9 10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80+ 80-84 85-89 90-94 95-99 100+ Females Males

United States of America

444,168

Population

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Demographics: Nigeria – Now & 2050

2011

(20,000) (10,000)

• 10,000

20,000 0-4 5-9 10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80+ 80-84 85-89 90-94 95-99 100+ Females Males

Nigeria

162,394

Population

2050

(20,000) (10,000)

• 10,000

20,000 0-4 5-9 10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80+ 80-84 85-89 90-94 95-99 100+ Females Males

Nigeria

291,619

Population

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Demographics: Russia – Now & 2050

2011

(10,000) (5,000)

• 5,000

10,000 0-4 5-9 10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80+ 80-84 85-89 90-94 95-99 100+ Females Males

Russian Federation

144,561

Population

2050

(10,000) (5,000)

• 5,000

10,000 0-4 5-9 10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80+ 80-84 85-89 90-94 95-99 100+ Females Males

Russian Federation

124,943

Population

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50 100 150 200 250 1992 1994 1996 1998 2000 2002 2004 2006

Thailand China Vietnam

Competitive advantage Average monthly w ages*, $ Source: EIU, * excluding social security

Source: Lockheed Corporation

Wages

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Wages

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3.0% 91% 87% 17% 6.5% 57% 45% 35% 0% 20% 40% 60% 80% 100% Infant Mortality Adult Literacy Women Literacy Income < $1/day India China

The Middle-Class: China versus India

China vs India Urban Housebolds by Income

• 20

40 60 80 100 120 140 < $2000 $2000-7500 > $7500

Income Urban Households (million)

India China

Source: The Economist, 2008

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Middle Class Urban Households

50 100 150 200 250 300 350 400 1985 1995 2005 2015 2025 million urban households

• ver $25,000 Income

$25,000 $12,500 $5,000 Umder $3100 Source: The Economist, McKinsey, 8/5/06

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$2,000 to $12,000 is the sweet spot for consumption (Penetration of durable goods relative to annual income)

$12,000 = 90,000 RMB $2,000 = 15,000 RMB

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Raw Materials A Virtuous Circle of Frontier/Emerging Market Trade

0.0% 15.0% 30.0% 45.0% 60.0% 75.0% 90.0% Copper Non Ferrous Metals (Total) Oil Iron Zinc Ore & Concentrate Aluminium Oxide

Potential suppliers

China needs… Africa has to sell

Source: Deutsche Bank, 7 December 2006 Zambia DRC Ghana Niger South Africa Zimbabwe Angola Cameroon

• E. Guinea

Gabon Nigeria DRC Mauritania South Africa E. Guinea South Africa

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Resource World Rank Country Resource World Rank Country Barite 6 Algeria Lead 1 Algeria Barite 14 Bulgaria Lead 4 Macedonia Barite 18 Vietnam Lead 7 Namibia Bauxite 1 Guyana Lead 12 Zambia Bauxite 8 Guyana Lead 14 Serbia Bauxite 11 Kazakhstan Lead 17 Turnisa Bismuth 8 Kazakhstan Molybdenum 6 Armenia Boron 9 Kazakhstan Molybdenum 8 Kazakhstan Cadmium 6 Kazakhstan Molybdenum 13 Mongolia Cesium 2 Namibia Nickel 15 Botswana Cesium 3 Zimbabwe Nickel 17 Zimbabwe Chromite 2 Kazakhstan Niobium 7 Namibia Cobalt 4 Zambia Niobium 8 Nigeria Copper 2 Zambia Niobium 11 Uganda Copper 5 Namibia Phosphate 15 Senegal Copper 7 Uganda Rhenium 2 Armenia Copper 8 Botswana Soda 6 Uganda Copper 9 Zimbabwe Soda 2 Botswana Diamonds 2 Botswana Soda 7 Kenya Diatomite 12 Romania Vermiculite 6 Zimbabwe Fluorspar 5 Mongolia Zinc 1 Algeria Fluorspar 8 Namibia Zinc 3 Namibia Fluorspar 9 Kenya Zinc 5 Zambia Ilmenite 12 Vietnam

Raw Minerals & Energy ….The Frontier is Rich

Proven reserves: Oil: Natural Gas: Thousand million barrels World Rank Trillion cubic metres World Rank Africa Algeria 12.2 17 4.5 10 Africa Angola 13.5 15 Africa Chad 0.9 42 Africa Gabon 3.2 31 Africa Libya 43.7 8 1.5 22 Africa Nigeria 36.2 10 5.2 8 Africa Rep. of Congo 1.9 35 Africa Sudan 6.7 21 Africa Tunisia 0.6 46 Asia Azerbaijan 7.0 20 1.2 24 Asia Bangladesh 0.4 39 Asia Kazakhstan 39.8 9 1.8 18 Asia Pakistan 0.9 28 Asia Turkmenistan 0.6 47 7.9 4 Asia Uzbekistan 0.6 48 1.6 21 Asia Vietnam 4.7 25 0.6 31 Eastern Eur Romania 0.5 49 0.6 30 Eastern Eur Ukraine 0.9 27 Latin Am Bolivia 0.7 29 Latin Am Colombia 1.4 38 0.1 48 Latin Am Ecuador 3.8 28 Latin Am Trinidad & Tobago 0.8 44 0.5 35 MidEast Bahrain 0.1 50 MidEast Iran 137.6 2 29.6 2 MidEast Iraq 115.0 3 3.2 12 MidEast Kuwait 101.5 4 1.8 19 MidEast Oman 5.6 23 1.0 26 MidEast Qatar 27.3 13 25.5 3 MidEast Saudi Arabia 264.1 1 7.6 5 MidEast Syria 2.5 34 0.3 45 MidEast United Arab Emirates 97.8 6 6.4 7 MidEast Yemen 2.7 32 0.5 34 Source: British Petroleum, 2009

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African Opportunity

U.S. China India

Spain

France Ger It E. Europe

Japan

U.K.

Portugal Netherlands Mongolia

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Deposits & Loans versus GDP

10% 100% 1000% 10% 100% 1000% Deposits % GDP Loans % GDP Pakistan Panama Uganda Ireland Malaw i Mexico Lebanon Russia Belgium EAFE Netherlands Singapore HK Ukraine Source: Consultative Group to Assist the Poor, World Bank, 2009 Zambia

Banking Opportunity

Bank Accounts per Adult

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 $100 $1,000 $10,000 $100,000 GDP / Capita Bank Acouts/Adult Ukraine Paraguay Eatonia Mongolia Malaw i Uraguay Slovenia Pakistan Bangladesh US Malaysia Austria Belgium India Source: Consultative Group to Assist the Poor, World Bank, 2009

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Education Strathmore University, Nairobi

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Technology

Source: Human Security Centre, UBC

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Entrepreneurship

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Middle Class - Bangladesh Bashundara City Mall, Dhaka, Bangladesh

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Middle Class

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Stock Opportunities

Great Businesses – Simple operations – Growth potential – Sidecars and monopolies Strong Management – Experienced – English speaking – Trained abroad Good Information – Annual Reports (Big 4 Audits) – Investor Relations & Websites

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Stock Opportunities

PE ROE Yield Growth Investment Co. 6.1x 24% 0.0% 25% Bank 3.9x 25% 0.0% 20% Conglomerate 4.0x 19% 2.6% 20% Petroleum Dist 7.2x 25% 4.3% 30% Dairy 9.8x 22% 0.0% 30% Tobacco 5.0x 37% 12.3% 20%

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Commercial Bank of Zimbabwe

• Largest bank in the country with 30% market share
• Exposure to growing economy and return of consumption
• Diversification in Banking, Asset Management, Insurance
• 2011e: PE 3.9X, ROE 25%, Earn. Growth 65%, PEG 0.2X
• Auditor: KPMG

Stock Example:

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Qatar Fuel, Qatar

• Largest LNG and refined petroleum distributor in country
• Qatar is #1 LNG exporter in the world
• Strong Parent (40% government owned)
• 2011e: P/E 7.2X, ROE 25%, Yield 4.3%, PEG 0.25X
• Auditor: Deloitte & Touche

Stock Example:

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Stock Example: Dairibord, Zimbabwe

• Privatized 1994, largest dairy producer in Zimbabwe
• Milk Consumption: Zimbabwe 8 liters/capita vs 25 in 1990, 20 in Uganda,

92 in U.K.

• 65% share in milk, 50% share in ice cream, 20% share in beverages
• Cow milk yields fell from 21 liters/day to 8, now recovering
• Spare capacity being reopened
• 20% of sales through 500 bicycle vendors, adding 300 more
• 2011e: PE 9.8x, Price/Book 1.5x, ROE 22%, Earnings Growth 25%+
• Auditor: Ernst & Young

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Botswana Stock Exchange

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Frontier Returns have been good

10 1000

Jan-79 Jan-81 Jan-83 Jan-85 Jan-87 Jan-89 Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11

EM EAFE

Source: MSCI /S&P Mar 2011

S&P + EAFE Index (7/82 = 100)

Frontier S&P 500

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Frontier Returns have been good

Index Returns 1996 - 2010

• 80%
• 60%
• 40%
• 20%

0% 20% 40% 60% 80% 100% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

S&P 500 Index MSCI EAFE MSCI Emerging Mkts S&P/IFC Frontier Composite

Source: S&P/IFC, FrontierMcapRtnsVol0910, 2010

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Frontier Market Valuation is Attractive

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Frontier Markets are attractive on Price/Book

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Frontier Markets are attractive on ROE

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Frontier volatility is lower than Emerging Markets

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Correlations are low among frontier countries

The average correlation of 20 Frontier Markets with Bangladesh is 0.27 The average correlation of 20 Frontier Markets with Botswana is 0.38

Correlations with: Bangladesh Botswana Bangladesh 1.00 0.16 Botswana 0.16 1.00 Bulgaria 0.23 0.48 Cote d'Ivoire 0.33 0.36 Croatia 0.29 0.54 Ecuador (0.10) 0.17 Estonia 0.30 0.39 Ghana 0.04 (0.05) Jamaica 0.04 0.31 Kenya 0.57 0.29 Latvia 0.17 0.41 Lebanon 0.45 0.32 Lithuania 0.16 0.44 Mauritius 0.38 0.52 Namibia 0.22 0.44 Romania 0.11 0.51 Slovak Repub 0.17 0.42 Slovenia 0.30 0.52

• Trin. & Tobago

0.14 0.00 Tunisia 0.40 0.51 Ukraine 0.32 0.33 Average (ex 1.00) 0.27 0.38 Source: S&P 36 mos Dec 2010

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Correlation is low

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Correlation is low

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BUSINESS FREEDOM

• Starting a business—procedures (number), time (days), cost (% of income per capita),

minimum capital (% of income per capita)

• Obtaining a license—procedures (number), time (days), cost (% of income per capita)
• Closing a business—time (years), cost (% of estate), recovery rate (cents on the dollar)

TRADE FREEDOM

• The trade-weighted average tariff rate
• Non-tariff barriers: quantity restrictions, price restrictions, regulatory restrictions, investment

restrictions, customs restrictions, and direct government intervention FISCAL FREEDOM

• The top tax rate on individual income and on corporate income
• Total tax revenue as a percentage of GDP

GOVERNMENT SIZE

• Government spending % of GDP

MONETARY FREEDOM

• The weighted average inflation rate for the most recent three years
• Price controls

INVESTMENT FREEDOM

• Restrictions in sectors related to national security or real estate
• Expropriation risk
• Access to foreign exchange
• Restrictions on transfers or capital transactions

Heritage Foundation – Economic Freedom Ranks

FINANCIAL FREEDOM

• Central Bank Independence
• Freedom of credit allocation
• Contract enforcement
• Presence of private financial institutions
• Foreign financial institutions not restricted

PROPERTY RIGHTS

• Private property guaranteed by the government
• There is no corruption or expropriation
• The court system enforces contracts efficiently and quickly.
• The justice system punishes those who unlawfully confiscate private

property CORRUPTION

• Transparency International‘s Corruption Perceptions Index (CPI)

LABOR FREEDOM

• Ratio of minimum wage to the average value added per worker
• Hindrance to hiring additional workers
• Rigidity of hours
• Difficulty of firing redundant employees
• Legally mandated notice period

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30 60 90

Hong Kong Singapore Australia New Zealand Switzerland Canada Ireland Denmark United States Bahrain Chile Mauritius Luxembourg Estonia Netherlands United Kingdom Finland Cyprus Japan Sweden Austria Germany Lithuania Taiwan Qatar Georgia Czech Republic Norway Belgium Spain Uruguay South Korea Oman Slovakia Jordan Botswana Peru Barbados Israel Iceland Colombia

30 60 90 Mexico UAE Costa Rica Hungary Malaysia Saudi Ar Macedonia Latvia Jamaica Trinidad Kuwait Panama Bulgaria Romania Thailand Slovenia France Turkey Portugal

• S. Africa

Namibia Rwanda Montenegro Paraguay Kazakhstan Guatemala Uganda Croatia Greece Italy Lebanon Dom Rep Azerbaijan Zambia Morocco Mongolia Ghana Egypt Nicaragua Tunisia Serbia Cambodia Bhutan Bosnia Kenya Sri Lanka Tanzania

30 60 90

Mozambique Nigeria Mali Brazil Philippines Indonesia Malawi Senegal Moldova Cote d'Ivoire Pakistan India Yemen Bangladesh Algeria Mauritania Haiti China Cameroon Argentina Guinea Vietnam Laos Syria Ethiopia Russia Nepal Bolivia Guyana Belarus Lesotho Ecuador Liberia Angola Uzbekistan Ukraine Turkmenstn Iran Libya Burma Venezuela Eritrea Cuba Zimbabwe North Korea

Economic Freedom – The Heritage Foundation

2011 (Frontier Markets in Dark)

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Inefficiency = Opportunity

• ―Our retail investors are just trying to follow the others, keen to know what the so called

‗gamblers‘ are going to buy: – ‗I heard this share's price will jump, because some gambler is going to buy it‘

• In our market, we have some stocks like Apex foods, Apex tannery, Apex footwear, Apex

Spinning, Apex weaving etc. These companies are doing different kinds of business. Some are involved in textiles, some in foods and some in footwear. – If there is a good news for say… Apex footwear- that is involved in footwear business, all companies that name begin with Apex will start rising.

• They are acting as a group even though the business is different and the owners are

different for some companies.‖

• We have different multinational companies that are involved in different business that are

totally different from other multinational‘s business. – For example, Bata is multinational company involved in footwear business where British American Tobacco involved in tobacco business that has no relation with Bata.

• When the multinationals start rising, all multinationals start rising together
• Investors have a general preference of stock dividend over cash dividend. They always

like to have stock dividend. If a cash dividend paying company declares stock dividend, the price will immediately start jumping.

• Low Price/Share or Price/Par Value

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Inefficiency = Opportunity

– Few Chartered Financial Analysts – Locals more Important than Foreign Investors

• Bangladesh: 3% per Equity Partners Limited
• Kenya: 10% per Kestrel Capital
• Malawi: 40% per Trust Securities
• Vietnam: 40% per Ho Chi Minh Stock Exchange

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Local Behavior in Bangladesh

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Optimism – The Pew Survey Money does buy Happiness….

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Life Satisfaction versus Income

10 20 30 40 50 60 70 80 $100 $1,000 $10,000 $100,000 GDP/Capita USD

% Satisfaction 7-10

Series1 Developed Emerging Frontier

• Log. (Series1)

USA

Source: Pew Opinion Survey 2007, Ondine Frontier Countries0706

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Optimism – The Pew Survey But Optimism is rare in the Richest Places

Optimism versus Income

10 20 30 40 50 60 70 80 90 100 $100 $1,000 $10,000 $100,000

GDP / Capita % Optimistic

Source: Pew Opinion Survey 2007

Mali Senegal Bangladesh USA Pakistan India South Africa

Kenya

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Optimism – The Pew Survey The Optimists are in the Poorer Countries

.

"Next Generation Better Off" versus Income

10 20 30 40 50 60 70 80 90 100 $100 $1,000 $10,000 $100,000

GDP / Capita % Optimistic

Series1 Developed Emerging Frontier

• Log. (Series1)

Source: Pew Opinion Survey 2007 Japan Bangladesh China USA Italy

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Optimism: Determination

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Optimism: Determination

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Optimism: Determination

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Optimism: Determination

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Optimism: Determination

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Optimism: Determination

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Hope for the Future

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Conclusion: Reasons for optimism

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Correlation is low with Emerging Markets

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Results

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Results

Back To The Future

Back To The Future

Back To The Future

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What‘s Emerging in Emerging Markets

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Frontier market growth prospects

Key fund exposures

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Source: World Bank ,as at August 2011, in USD.

Valuations and profitability

Frontier Markets attractively valued relative to Emerging Markets

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Source: Russell Investments, Factset as at 15/08/2011. Analysis limited to companies with a minimum ROE of 10%. Frontier as represented by the Russell Frontier Markets Index and Emerging as represented by the Russell Emerging Markets Index

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Liquidity Review *

5/2/2008 3/6/2009 10/28/2011 % chg 3/09-10/11 Africa $20.0 $5.4 $20.4 280% E Europe $32.8 $6.5 $8.2 26% Latin America $19.9 $11.3 $7.0

• 38%

Asia $61.0 $35.4 $44.9 27% Total $133.7 $58.5 $80.5 38% Top Quartile $20.1 Est Firm Capacity ex-GCC $201 * Firm Capacity estimate based on holding 10 days volume

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Child Mortality –

http://www.gapminder.org/downloads/

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Emerging and Frontier Market Capitalization Benefits to being Early Mover

Source: MSCI, BGI, Lockheed - 2010

• 500,000

1,000,000 1,500,000 2,000,000 2,500,000 3,000,000 3,500,000 4,000,000 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 US$ Millions

* Represents free float market capitalization as of June 1st 2009. Source: MSCI, BGI.

$111 billion* – Frontier Markets Emerging Markets

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Presscorp, Malawi

• Diversified conglomerate including Coca Cola and Carlsberg franchises
• Growing economy and rising consumer in Malawi
• Strong management (CEO was Central Bank Governor with MIT PhD)
• 2011e: P/E 3.3X, P/BV 0.6X, Earn. Growth 22%, PEG 0.2X
• Auditor: KPMG

Stock Example:

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Our Investment Process: Bottom-up Driven

Discipline Inputs Objective Country Analysis Country Visits Economics – Growth, Inflation, Currency, Population Politics – Stability, Regulation, Taxation, Trade Market – Liquidity, Transparency, Governance Limit universe to investable markets Security Analysis Company Visits Conference Calls Analyst Contacts Financial Statements Company and Industry Reports Database Analysis Earnings Modeling PB-ROE Modeling PEG Ratios Quarterly Comparisons & Projections Company Checklists Buy/Sell Ideas Portfolio Construction Stocks we like include:

• Sidecars (a strong strategic partner)
• Franchises (profitable niches)
• Monopolies

Buy: 40-50 stocks in 20 countries Sell: When fundamentals deteriorate or a better idea is found Limit: Stocks to 10% at cost, cut back at 15%, Country limit 25% Trade: Patiently Horizon: Long (turnover target < 33%)

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Peraliya, Sri Lanka

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It‘s about people

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It‘s about people

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It‘s about people

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Work Ethic

105

Vietnam versus India

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Population

http://www.worldmapper.org/display.php?selected=117

Power Consumption

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Education, Work Ethic, Entrepreneurship, Middle Class

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Swissport, Tanzania

• China–Tanzania Relationship
• Sidecar Investment
• 2009e: PE 5.2x, ROE 53%, Yield 15.3%, Earn. Growth 15%
• Auditor PWC

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Risk… Fewer Conflicts

Source: Human Security Centre, UBC

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More Peacekeepers and Tribunals

Source: Human Security Centre, UBC

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Trust

Paul Bond is a lawyer at the Brown & Long law firm. One day while standing outside his office at Brown & Long he overheard John Grand, another lawyer at the firm, talking with an associate about his work on a proposed purchase of the Pillow company by the Down company for $120 per share. Paul Bond had no role in the work on the proposed purchase of Pillow and Brown & Long represented only Down, not Pillow. Paul Bond bought 1,000 shares of Pillow for $70 per share. Please rate Paul’s behavior as: Completely Fair, Acceptable, Unfair, or Very Unfair.

Source: Meir Statman, Countries and Culture in Behavioral Finance, CFApubs.org, Sept 2008

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Trust

Source: Meir Statman, Countries and Culture in Behavioral Finance, CFApubs.org, Sept 2008

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Democracy & Trust, Mark Warren, 1999

Trust is related to income… and cultural history

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Routledge Research, Paul Zak, 2008

Trust

• Education –

Increases the quality of formal institutions that enforce contracts, Decreases income inequality, and Directly raises trust by raising incomes

• Press freedoms and civil liberties increase the quality of

civil institutions and thereby trust

• Telephones and roads directly raise trust by increasing

social ties between interacting parties

• Income transfers reduce inequality and thereby raise trust.

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Routledge Research, Paul Zak, 2008

Trust

Ecological measures pollution in the physical environment of

• exchange. It is dominated by measures of ―xenoestrogens‖ or

synthetic estrogenmimics (such as the pesticide DDT), and is strongly negatively related to trust.

Phyto is an index of phytoestrogen consumption. Phytoestrogens

are plant-based estrogens found in soybeans, legumes, wine, tea, and many other foods, and we find they are strongly positively related to trust.

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Investors’ Risk - Loss Aversion & Utility Function

• Coin toss: lose $100…. Win ??

Myopic Loss Aversion and the Equity Premium Puzzle, Shlomo Benartzi and Richard Taylor, Quarterly Journal of Economics 1998

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Investors’ Risk - Loss Aversion & Utility Function

• Coin toss: lose $100…. Win ??
• Paul Samuelson‘s wager:

– Coin toss: win $200, lose $100 – Colleague‘s response: ―no‖ for one toss, ―yes‖ for 100 x

• Loss Aversion Factor ~ 2.5x
• 1 toss Utility = 50%*1*200 + 50%*2.5*(-100) = -25
• 2 toss Utility =

25%*win both+50%*split+25%*lose both = .25*400 + .5*100 + .25*2.5*(-200) = +25

Myopic Loss Aversion and the Equity Premium Puzzle, Shlomo Benartzi and Richard Taylor, Quarterly Journal of Economics 1998

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Investors‘ Risk

Source: Meir Statman, Countries and Culture in Behavioral Finance, CFApubs.org, Sept 2008

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U.S. Problems – 10th Grade Mathematics

Slovakia Latvia U.S. Russia

http://www.pisa.oecd.org/dataoecd/1/63/34002454.pdf

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The Once and Future King(s)?

From Wall Street to the Great Wall – Burton Malkiel 2008

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China‘s Road Construction

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Rich World vs Poor World – NO Sub-Prime Mortgages

124

Urbanization = 10x Productivity

Source: GaveKal 0604

% Urban 2005 2030 China 40.5% 60.5% India 28.7% 41.4%

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Source: BP Statistical Review of World Energy, U.S. Census global population database, respective state statistics bureaus for GDP.

Middle Class = Resource Needs…Oil

3 6 9 12 15 18 21 24 27 30 33 1900 1905 1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 Oil consumption per capita (barrels/year)

U.S.A.

• S. Korea

Japan

Oil per capita rises rapidly in response to the GDP growth afforded by inexpensive labor, then levels off in a service economy at saturation.

India P.R. China

The two lower lines are EIA's High Growth case for China and India. 2006-07E estimates from EIA.

Hong Kong

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Comparison of Chinese and US Autos as Percent

• f Population

Source: Morgan Stanley; FactSet As of 31-Dec-05

50,000,000 100,000,000 150,000,000 200,000,000 250,000,000 300,000,000 1900 1905 1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005E Passenger Autos & Trucks 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% Penetration Rate of Passenger Autos & Trucks US Total # Passenger Cars and Trucks on July 1 Chinese Cars US Penetration Rate: Passenger Vehicles/Population Chinese Penetration Rate: Autos/Population

Middle Class = Resource Needs…Oil

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Comparison of the Pace of Chinese and US Passenger Vehicle Penetration

Source: Morgan Stanley; FactSet As of 31-Dec-05

2,000,000 4,000,000 6,000,000 8,000,000 10,000,000 12,000,000 14,000,000 16,000,000 1900 1902 1903 1905 1907 1908 1909 1910 1911 1912 1913 1914 1915 1916 1917 1918 1920 1921 1923 US Passenger Vehicles

2,000,000 4,000,000 6,000,000 8,000,000 10,000,000 12,000,000 14,000,000 16,000,000 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005E

Chinese Cars

Middle Class = Resource Needs…Oil

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What Does The Future Hold… in 2050? GDP 2008 EAFE 56% China 5% India 2% Frontier 4% Emerging Markets 10% United States 23% Est 2025 GDP (Bil) EAFE 47% China 11% India 3% Frontier 5% Emerging Markets 13% United States 21% Est 2050 GDP (Bil) EAFE 40% China 18% India 4% United States 18% Emerging Markets 14% Frontier 6% Source: World Bank. UN Population Survey, ChinaGDPperCapita0912.xls

Assumptions: Growth to 2015 ~= 2000-2008, 2016-2025 lose 1/3 of premium over 2.5%, 2026-2050 lose another 1/3

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Relative Economics

Source: World Bank and CIA World Factbook, Frontier Markets include those countries included in the MSCI Frontier Index, the S&P Frontier Index and the S&P Extended Frontier 150 Index and excludes those countries also classified as Emerging Markets.

• 1. GNI per Capita is for 2007 except Bahrain (2005), Kuwait (2005), Oman (2004), and UAE (2005). Qatar is excluded from the GNI

per Capita calculation. Population is for 2007 GDP Growth Rate is for 2007 except Bahrain (2005), Kuwait (2005), Oman (2005), Qatar (2005) and UAE (2005) Population Growth Rates are 2008 estimates

Average GDP Growth Rate Average Population Growth Rate Developed Markets 3.40% 0.42% Emerging Markets 6.12% 0.96% Frontier Markets 6.70% 1.00%

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