Growth Markets an introduction The BRIC concept was the dominant - - PowerPoint PPT Presentation

It’s time to redefine emerging markets:

“Growth Markets” – an introduction

The BRIC concept was the dominant theme of the last decade

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In 2001, Jim O’Neill first identified the BRICs; 10 years later, they have exceeded even our growth expectations1

1 Source: GSAM, GS Global ECS Research, as at Oct-11. * Re-scaled using US implicit GDP deflator.

This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. Please see additional disclosures.

1,000 2,000 3,000 4,000 5,000 6,000 Brazil China India Russia GDP (US$bn) 2000 GDP 2010 GDP projected in 2003* 2010 GDP actual

1 Source: Fortune magazine, 2010 Global Fortune 500. 2 Source: Forbes magazine, 2010 World Billionaires. 3 Source: S&P, Moody’s, Fitch, as at 1-Jan-11. 4 Source: http://www.citypopulation.de/world/Agglomerations.html. 5 Source: IMF World Economic Outlook 2010, as at October 2010. 6 Source: GSAM, “It is Time to Re-define Emerging Markets”, 31-Jan-11.

This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. Please see additional

• disclosures. For illustrative purposes only, and subject to change.

Are these characteristics of traditional Emerging Markets?

Home to almost 20% of Fortune 500 companies1 and 30% of the world’s billionaires2. Average investment grade sovereign debt rating3. Home to fifteen of the world’s twenty largest cities4. Six out of the fifteen largest economies, including the world’s second largest5. Eight out of the top ten contributors to global growth over the coming decade6.

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Redefining Emerging Markets: introduction to Growth Markets

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Source: GSAM, “It is Time to Re-define Emerging Markets”, 31-Jan-11.

1 Source: IMF, as at Apr-11. 2 Consistent with the IMF’s definition of advanced economies, ex Korea. As at Apr-11.

200+ countries in the world1

BRICs (Brazil, Russia, India & China) For example; US, Japan, Germany, UK and other G7 countries. For example; Nigeria, Vietnam, Philippines, Iran, Egypt, Pakistan and Bangladesh.

Emerging Markets Growth Markets Developed Markets2

• Current share of global GDP < 1%
• Generally low GDP and incomes per capita,

but rapidly increasing in places

• Scope for improvement of investment

environment

• High average income per capita
• Advanced stages of economic

development

• Open and transparent financial markets
• Current share of global GDP
• Favourable demographics and rising

productivity going forward

• Adequate market size and depth to

achieve scale and liquidity 32 countries2 8 countries 160+ countries South Korea, Mexico, Indonesia and Turkey. N-11

We believe the Growth Markets will be 8

• ut of the top 10 contributors to global

growth over the next decade

1 Source: Global ECS Research, Global Economics Paper 208, “The BRICs 10 Years On: Halfway Through The Great Transformation”, as at 7-Dec-11.

This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. Please see additional disclosures..

Contribution to Global GDP (2010-2019)1

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0% 10% 20% 30% 40% 50% 60% Growth Markets BRICs China G7 N-11 US India Russia Euro zone Brazil Mexico Indonesia Korea UK Turkey Japan Iran

Growth Markets have the essential growth conditions in place

The Growth Environment Scores (GES) are designed as a simple representation of the conditions necessary for convergence (i.e. catch-up growth) to occur. For an equivalent GES, less developed countries should grow faster. Some simple regressions of growth on income per capita and the index suggest that one point on the index adds about 0.6% to a country’s growth rate, and there is also evidence that it increases the convergence speed significantly. (Definition source: GS Global Economics Paper No:134 “How Solid are the BRICs? - Appendix 2: Measuring Conditions: How the GES is Compiled”, as at 1-Dec-05). This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. Please see additional disclosures.

Growth Environment Scores

• The Growth Environment Score (GES) is calculated every year by Goldman

Sachs for over 180 countries.

• It monitors productivity and sustainability of growth.
• Scores range from 0-10 (where 0 is the worst and 10 is the best).
• The factors considered are:

Macroeconomic stability

• Inflation
• Government balance
• External debt

Macroeconomic conditions

• Investment rates
• Openness of the economy

Technological capabilities

• Phone penetration
• Personal computer penetration
• Internet penetration

Human capital

• Educational levels
• Life expectancy

Political conditions

• Political stability
• Rule of law
• Corruption indices

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1 2 3 4 5 6 7 8 South Korea Brazil China Mexico Turkey Russia Indonesia India Vietnam Iran Philippines Egypt Nigeria Bangladesh Pakistan 1997 - 2010 GES Change 1997 GES 2010 Developing Average

Growth markets Other N-11 countries

!

Goldman Sachs Asset Management 5 31 January 2011

Exhibit 3 – Country Classification (2010 GDP Share)

Source: GSAM *Up to the smallest N-11. Source: IMF World Economic Outlook 2010, GSAM calculations *Original projections re-based from 2007 to 2010. Source: GS Global ECS Research, GSAM calculations

1 2 3 4 5 6 7 8 9 10 Global GDP Share, % Exhibit 4 – Split Between Growth And Emerging Markets 2010 Share in Global GDP Share in Global GDP Cut-off Point (1%)

Emerging Markets* Growth Markets

10 20 30 40 50 60 70 80 % Exhibit 5 – Growth Markets Will Be the Largest Contributors to Global GDP Increases This Decade and Beyond* 2010 - 2019 2020 - 2029 2030 - 2039 2040 - 2049

Identifying the 15 countries that we believe are really going to matter

1 Source: IMF, as at Apr-11.

This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. For illustrative purposes only. Please see additional disclosures.

Finding the most attractive countries in a broad landscape

Lots of opportunities to consider

N-11 BRIC

Focusing on the 15 countries that we believe are really going to matter Little consistency between index providers

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170+

Total non-developed countries in the world1

What is an ‘Emerging Market’?

Dow Jones =35 countries MSCI = 21 countries FTSE = 6 advanced and 13 secondary Standard & Poors = 19 countries

15

Most attractive Investment

• pportunities

BRICs +N-11

1 Source: “Global Economics Paper No: 204”, GS Global ECS Research. 8-Sep-10.

This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. Please see additional disclosures..

Composition of World Equity Market Cap1 2010 2020 2030

BRICs + N-11 23% Other EM 8% US 32% Develope d Markets (ex US) 37% BRICs + N-11 36% Other EM 8% US 27% Develope d Markets (ex US) 29% BRICs + N-11 46% Other EM 9% US 23% Developed Markets (ex US) 22%

BRICs + N-11 could comprise a much larger proportion of global market capitalisation

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Total World Equity Market Cap = $43 trillion Total World Equity Market Cap = $83 trillion Total World Equity Market Cap = $145 trillion

Why now?

'

Goldman Sachs Asset Management

South Africa Malaysia, 3.5% Thailand, 1.9% Other EM, 5.5%

BRIC and N-11 increases exposure to higher growth areas

MSCI EM Index1 EM Index + Goldman Sachs N-11 Equity Fund (75:25) Goldman Sachs BRIC + N-11 Equity Funds (70:30)

S th K Bangladesh, 0.7% Vietnam, 0.7%

Other Emerging Markets BRIC + N-11 Countries

Turkey 3 8% Nigeria, 1.8% Philippines, 1.6% Bangladesh, 0.8% Pakistan, 0.8% Egypt, 0.8% Vietnam, 0.6% South Africa, 0.6% China, 17.8% Brazil, 15.1% South Korea, 15.0% Russia, 6.3% India, 6.2% Mexico, 4.7% Indonesia, 3.0% Turkey, 1.2% Philippines, 0.7% Egypt, 0.3% Taiwan, 10.9% South Africa, 7.8% Financials, Cons Disc, 8.1% Industrials, 6.4% Utilities, 3.7% Health Care, 1.0% Financials, Cons Staples, 9.2% Industrials, 6.6% Utilities, 3.6% Health Care, 0.9% Cons Staples, 6.4% Industrials, 5.9% Utilities, 2.7% Health Care, 1.2%

r Country

South Korea, 17.0% China, 13.1% Brazil, 11.7% Mexico, 9.4% Indonesia, 6.0% Russia, 5.6% India, 4.9% Turkey, 4.6% Philippines, 1.4% Nigeria, 1.1% Pakistan, 0.9% Egypt, 0.7% Other EM, 22.8% China, 27.7% Brazil, 23.2% Russia, 9.7% India, 9.4% Mexico, 7.2% Korea, 6.9% Indonesia, 5.3% Turkey, 3.8%

FOR USE WITH FINANCIAL INTERMEDIARIES ONLY – NOT FOR DISTRIBUTION TO CLIENTS OR THE GENERAL PUBLIC. #%

LK87*B=?*M-##*,3=?*B>>+0B:<+=)*B4/*B)*+,*!#-./0-##1** N;/*M-##*/O3<:H*,3=?*<)*A/=0;@B4P/?*:+*:;/*6278*Q.D*R/<G;:/?*M-##*/S*84B=*8=?/S1 D>/B)/*=+:/*:;B:*:;/*Q2*M-##*IO3<:H*D+4:,+><+*<)*)3AT/0:*:+*>/GB>*B=?*4/G3>B:+4H*E4+;<A<:<+=)*U<:;*4/GB4?)* :+*<=V/):@/=:)*<=*84B=1*()*B*4/)3>:*+,*:;<)*:;/*,3=?*U<>>*=+:*<=V/):*<=*84B=1* W+4*<=,+4@B:<+=*+=*:;/*./V/>+E/?C*Q4+U:;**B=?*I@/4G<=G*6B4P/:)*,4B@/U+4PC*E>/B)/*4/,/4*:+*)><?/*!1*W+4*<=,+4@B:<+=B>*E34E+)/)*+=>H1 , 23.8% Energy, 14.0% Materials, 13.4% IT, 13.1% Telecom, 8.5% Cons Staples, 8.1% , 23.7% Materials, 12.3% Energy, 12.2% IT, 11.7% Telecom, 10.5% Cons Disc, 9.3% Financials, 27.2% Energy, 18.8% Materials, 12.8% Cons Disc, 9.7% Telecom, 8.6% IT, 6.8%

Sector

Goldman Sachs Asset Management

BRIC and N-11 markets have outperformed the global equity markets

BRIC and some N-11 countries have also produced greater returns over the past 10 years relative to broader EM

!X &Y

10 Year Average Annual Returns (as of 12/31/2011)

2+340/5*L>++@A/4G Past performance of the various indices shown does not guarantee future results and do not reflect the performance of the Goldman Sachs N-11 Equity Fund or any Goldman Sachs Asset Management product. The Goldman Sachs N-11 Equity Fund incepted on 2.28.11 and does not have a performance history. Please note that you cannot invest directly in an index 8=?/S 8=?/S %Z1%Y %[1#Y %#1ZY %#1#Y %&1!Y #'1%Y #X1ZY #%1%Y '1\Y X1'Y #\1%Y #!1'Y \1#Y !1$Y &1&Y X1&Y #&1&Y #X1&Y %&1&Y %X1&Y !&1&Y !X1&Y 8=?+=/)<B DBP<):B= IGHE: 6/S<0+ LB=G>B?/); D;<><EE<=/) N34P/H ]+4/B M<G/4<B ^</:=B@ LK87 I6 R+4>? Q-' FOR USE WITH FINANCIAL INTERMEDIARIES ONLY – NOT FOR DISTRIBUTION TO CLIENTS OR THE GENERAL PUBLIC. directly in an index. Emerging market securities may be more volatile and less liquid than investment in developed markets and will be subject to the risks of currency fluctuations and sudden economic or political developments. N;<)*<=,+4@B:<+=*?<)03))/)*G/=/4B>*@B4P/:*B0:<V<:HC*<=?3):4H*+4*)/0:+4*:4/=?)C*+4*+:;/4*A4+B?-AB)/?*/0+=+@<0C*@B4P/:*+4*E+><:<0B>*0+=?<:<+=)*B=?*);+3>?*=+:*A/*0+=):43/?*B)*4/)/B40;*+4* <=V/):@/=:*B?V<0/1 LB=G>B?/);*<)*4/E4/)/=:/?*AH*:;/*.;BPB*2:+0P*IS0;B=G/*Q/=/4B>*<=?/S*_.F(](58M.`1*(*U/<G;:/?*(V/4BG/*);B4/*E4<0/*<=?/S*0B>03>B:/? B00+4?<=G*:+*:;/*2I7*.8KI7N8^I1*IGHE:*<)* 4/E4/)/=:/?*AH*:;/*FIK6I2*W<=B=0<B>*8=?/S*_FW8`1*8:*:4B0P)*:;/*@+):*B0:<V/*IGHE:<B=*):+0P)*:4B?/?*+=*:;/*7B<4+*B=?*(>/SB=?4<B 2:+0P*IS0;B=G/)1*N;/*FW8*<)*0BE<:B><JB:<+=*U/<G;:/?*B=?*<)* 0B>03>B:/?*+=*B*:+:B>*4/:34=*AB)<)C*U<:;*:;/*4/<=V/):@/=:*+,*?<V<?/=?)1*8=?+=/)<B*<)*4/E4/)/=:/?*AH*:;/*aBPB4:B*2:+0P*D4<0/*_a78`*8=?/S1*8:*<)*@+?<,</?*0BE<:B><JB:<+=-U/<G;:/?*<=?/S*+,*B>>*):+0P)* ><):/?*+=*:;/*4/G3>B4*A+B4?*+,*:;/*8=?+=/)<B*2:+0P*IS0;B=G/1*]+4/B*<)*4/E4/)/=:/?*AH*:;/*]92D8*8=?/S1*8:*<)*B*0BE<:B><JB:<+=-U/<G;:/?*<=?/S*+,*B>>*0+@@+=*);B4/)*+=*:;/*]+4/B=*2:+0P* IS0;B=G/)1*M<G/4<B*<)*4/E4/)/=:/?*AH*:;/*M<G/4<B=*2:+0P*IS0;B=G/*(>>*2;B4/*_MQ2I8M.b`*8=?/S1*9=>H*+4?<=B4H*);B4/)*B4/*<=0>3?/?*<=*:;/*0+@E3:B:<+=*+,*:;/*<=?/S1*N;/*<=?/S*<)*VB>3/- 4/>B:<V/*B=?*<)*0+@E3:/?*?B<>H1*6/S<0+*<)*4/E4/)/=:/?*AH*:;/*6/S<0B=*8D7*_6IbL9c`*8=?/SC*B*0BE<:B><JB:<+=-U/<G;:/?*<=?/S*+,*:;/*>/B?<=G*):+0P)*:4B?/?*+=*:;/*6/S<0B=*2:+0P*IS0;B=G/1* DBP<):B=*<)*4/E4/)/=:/?*AH*:;/*]B4B0;<*2:+0P*IS0;B=G/*_]2I#&&`*8=?/S1*8:*0+@E4<)/)*:;/*:+E*0+@EB=H*,4+@*/B0;*+,*:;/*!\*)/0:+4)*+=*:;/*]2IC*<=*:/4@)*+,*@B4P/:*0BE<:B><JB:<+=1*N;/*4/):*+,* :;/*0+@EB=</)*B4/*E<0P/?*+=*B*@B4P/:*0BE*4B=P<=G1*D;<><EE<=/)*B4/*4/E4/)/=:/?*AH*:;/*D;<><EE<=/*2:+0P*IS0;B=G/*D2I<*8=?/S*_D796D`1*8:*<)*B*0BE<:B><JB:<+=-U/<G;:/?*<=?/S*0+@E+)/?*+,* ):+0P)*4/E4/)/=:B:<V/*+,*:;/*8=?3):4<B>C*D4+E/4:</)C*2/4V<0/)C*F+>?<=G*W<4@)C*W<=B=0<B>*B=?*6<=<=G*d*9<>*2/0:+4)*+,*:;/*D2I1*N34P/H*<)*4/E4/)/=:/?*AH*:;/*8):B=A3>*2:+0P*IS0;B=G/*MB:<+=B>* #&&*8=?/S*_be#&&`*8=?/S1*8:f)*B*0BE<:B><JB:<+=-U/<G;:/?*<=?/S*0+@E+)/?*+,*MB:<+=B>*6B4P/:*0+@EB=</)*/S0/E:*<=V/):@/=:*:43):)1*N;/*0+=):<:3/=:)*+,*:;/*82I*MB:<+=B>*#&&*8=?/S*B4/*)/>/0:/?* +=*:;/*AB)<)*+,*E4/-?/:/4@<=/?*04<:/4<B*?<4/0:/?*,+4*:;/*0+@EB=</)*:+*A/*<=0>3?/?*<=*:;/*<=?<0/)1*^</:=B@*<)*4/E4/)/=:/?*AH*:;/*^</:=B@*2:+0P*8=?/S*+4*^M-8=?/S1*8:*U<>>*B*0BE<:B><JB:<+=- U/<G;:/?*<=?/S*+,*B>>*0+@EB=</)*><):/?*+=*:;/*F+*7;<*6<=;*7<:H*2:+0P*IS0;B=G/1* #!

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Goldman Sachs Asset Management $&

Why increase Emerging Markets Equity allocation?

Most investors are underweight emerging markets today

Emerging Markets Exposure (% of total)

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Goldman Sachs Asset Management

Closing the gap: increasing EM allocation strategically

Potential investment options to shape today’s equity portfolios for the future

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Approach 1

Current Emerging Market Allocation

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Approach 2

We believe current valuations provide an attractive cyclical entry point for a robust secular growth opportunity

1 Source: GSAM, IBES, Datastream as at 5-Sep-11. 2 Source: Morgan Stanley, Asia/GEM Strategy Equity Flows Monitor, as at 7-Oct-11. 3 Source: Morgan Stanley, GSAM, IBES, Datastream as at 5-Sep-11. 4 Source: Morgan Stanley, as

at Sep-11. 5 Source: Morgan Stanley, GSAM, as at Sep-11. ERP calculated relative to 10 year US treasuries This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. Please see additional disclosures.

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Forward Price-to-Earnings ratio1

5 7 9 11 13 15 17 19 21 23 25 Forward price-to-earnings ratio

Developed Markets

Growth and Emerging Market equities: Saw $48bn in outflows

• ver 2011.1

Forward P/E ratio at 9.9x – lowest quartile and 23% discount to 20- Yr ave.2 P/B ratio approaching 1.7x – 16% discount to 5-Yr ave.3 Equity risk premium close to 2008 highs.4

Growth and Emerging Market equities look attractive relative to other asset classes

1 Source: GSAM, Datastream, as at 3-Feb-12.

This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. Please see additional disclosures.

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MSCI EM Index: equity risk premium vs. 10 year US treasuries1

50 100 150 200 250 300 350 400 1 2 3 4 5 6 7 8 9 10 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Equity risk premium to 10-Yr US treasuries (LHS) MSCI EM Index (RHS)

Equities look better value than debt in Growth and Emerging Markets

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2% 4% 6% 8% 10% 12% 14% 16% Earnings yield / Yield-to-Maturity MSCI EM Earnings Yield

Equity earning yield is twice that of the EMBI1 Equity dividend yields have converged toward debt yields1

1 Source: GSAM, UBS, IBES, Datastream as at 31-Jan-12. Equity universe shown for MSCI Emerging Markets Index. Debt universe shown for JPM Emerging Markets Bond Index (Global Diversified Composite).

This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. Please see additional disclosures.

0% 2% 4% 6% 8% 10% 12% 14% 16% Dividend yield / Yield-to-Maturity MSCI EM Dividend yield

STRATEGY SERIES It is Time to Re-define Emerging Markets

! ! ! Box: Q&A on Growth Markets Basics

• 1. By defining Growth Markets, are you broadening

the BRIC concept?

• No. The BRIC concept remains intact. By defining Growth

Markets, we simply identify those countries that have already grown large enough (above 1% of global GDP)— and have the potential to grow even larger—to be important for the global economy in a number of ways. These countries simply no longer fall under the traditional Emerging Markets definition. So the concept of Growth Markets is broader than the BRICs. It includes the BRICs, as well as four other countries (Mexico, Korea, Turkey and Indonesia).

• 2. What is the difference between a Growth Market

and a BRIC? A Growth Market is an economy which currently accounts for at least 1% of global GDP. A BRIC is an economy which already accounts for more than 1% and has the potential to be at least 3-5% of global GDP in the foreseeable future. The BRICs are a subset of the Growth Markets.

• 3. What is the difference between a Growth Market

and an N-11 member? The N-11 are the next set of largest population countries beyond the BRICs, which also have potential to grow much larger over the next several decades and have a BRIC-like impact in rivaling the G7. Four of the largest N- 11 countries, namely Mexico, Korea, Turkey and Indonesia, meet the Growth Market criterion today. There is an overlap between the Growth Markets and the N-11.

• 4. Could there be any more Growth Markets?

Of course. A number of countries in the Emerging Market universe could cross the 1% GDP threshold and achieve Growth Market status over time. According to GS Global ECS Research long-term GDP projections, the most likely candidates are Nigeria and the Philippines, which might grow sufficiently large by the mid-2040s. Egypt and Iran could also approach this threshold at some point over the horizon to 2050. See text for more discussion on this.

• 5. What defines the transition from a Growth Market

to a Developed Market? There is no strict rule that defines the transition from the Growth Market to Developed Market universe. A number

• f criteria would have to be reached, including robust

growth conditions, advanced financial markets as well as high income levels. Given its complexity, this decision will have to be somewhat subjective. Korea is a good example. While we still define it as a Growth Market, it would be the first country out of the eight in the group to graduate to Developed Market status. Korea already has robust growth conditions in place, and its financial markets are relatively well developed. In this case, wealth will serve as a legitimate cut-off point. As Korea raises its income per capita further, in line with the developed countries average, we will re-classify it as a Developed Market. However, this categorisation process could be less clear-cut in the case of other Growth Markets.

• 6. Can an Emerging Market become Developed

without becoming a Growth Market first? How does this transition work? Yes, there can be a direct transition. An Emerging Market does not necessarily have to become large to be classified as Developed. Just like in the case of Growth- to-Developed transition, there are no strict criteria. A transition to the Developed group from Emerging status would involve an even more arbitrary decision than a transition from Growth status. This is because Growth Markets, by construction, implicitly assume a certain level of growth conditions and financial market development, so incomes per capita there play a decisive

• role. The Emerging Market group is much more diverse
• n these parameters. So defining strict cut-off points is

not entirely sensible. The Gulf Cooperation Council (GCC) countries are a good

• example. They are already among the richest countries in

the world, but it is difficult to classify them as Developed.

• 7. Can a Growth Market slip back to the Emerging

group? It can. A Growth country that does not keep improving its growth conditions could drop below the 1% share of global GDP and thus move back to the Emerging Markets group. As highlighted in the text, it is absolutely critical for some countries such as India, Russia and Indonesia to address some of their most pressing issues in the near future.

• 8. Doesn’t Growth Market status imply that you think

these countries will always grow?

• No. Of course, these countries will experience cycles just

like others, but over time their share of global GDP, already above 1% each, is likely to rise.

• 9. Why don’t we get rid of the Emerging Market

name completely? If we could think of a smarter, non-offensive word that simply summarised their status, we would. However, this universe of countries is very diverse. Many are still in the early stages of development and still have the characteristics that led Antoine Van Agtmael to coin them as “Emerging Markets” in the early 1980s in the first place.