What

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Whats Emerging in Emerging Markets The New
Frontier
Texas Investment Portfolio Symposium March 24,
2006 Lawrence Speidell, CFA 5036 Founder
Co-Chief Investment Officer Ondine Asset
Management

• Lawrence Speidell

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Whats Emerging

• History
• The Past is Prologue
• Globalization
• Demographics
• Internet
• Jobs
• Middle-Class
• Risk
• Diversification and Risk are Opposites
• Optimism
• The World is NOT going to _at_?!! in a hand-basket

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Emerging Countries Under 10,000 GDP/capita
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Emerging Countries Under 10,000 GDP/capita
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Frontier Countries Not in MSCI Emerging Markets

• .

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HISTORY Emerging Countries Euphoria The
Golden Age of Emerging Markets 1989-1995

• Iron Curtain falls
• Communism Discredited
• Politicians Businessmen committed to Reforms
  transparency
• Rising Capital flows
• Falling Capital Costs
• Economic Growth
• Rising Liquidity
• Falling Volatility

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Emerging Countries Disappointment The Age of
the Innocents 1995-1998

• Crony capitalism
• Currency pegs
• Inadequate regulation
• 25 year old investment bankers

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Emerging Countries Disillusionment Age of
the Cynics 2000 - ?

• Peso Crisis, Asian Crisis, Russian Crisis,
  Brazilian Crisis, Venezuelan Crisis, Argentine
  Crisis, Turkish Crisis
• Corruption Cronyism
• Rising Volatility
• Falling Liquidity
• Rising Correlations

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History
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History
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History
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History
Cuyahoga River 1971
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History
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History
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History Progress
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History Progress
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History Progress
The GUM Department Store 1991
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History Progress
The GUM Department Store 1991 and 2002
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History Progress
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History Progress
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Shanghai The Maglev Train
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Chinathe Country
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Chinathe Country
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Pudong
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Night Life
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History Progress
Russia
2000
Bulgaria
1990
1990
1970
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Globalization Let there be light.
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Globalization Demographics

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Globalization Urbanization

• .

Urban 2005 2030 China 40.5 60.5 India 28.7
41.4
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Globalization Education
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Globalization Education
Source Jeremy Siegel, 2006
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Globalization Jobs
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Globalization Jobs
Hourly Labor Costs Mexico 1/6 U.S. China
1/6 Mexico
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What are our Products?
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Globalization Quality Products
World Class Production
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Globalization Quality Products
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Globalization - You Call, We Haul. . . .
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Education Jobs Middle Class
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Education Jobs Middle Class
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Education Jobs Middle Class
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Education Jobs Middle Class
India Passenger Car Sales
(Thousands)
1,000
900
Rate drops below 20
800
700
Introduced Financing
600
500
400
300
200
100
-
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
Source Citigroup India
As of 30-Nov-04
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A Virtuous Circle Inter-emerging market trade
What China needs
Source Deutsche Bank, 7 December 2006
47
A Virtuous Circle Inter-emerging market trade
Africa has to sell
Zambia DRC
Angola Cameroon E. Guinea Gabon Nigeria DRC
Ghana Niger South Africa Zimbabwe
Mauritania South Africa
South Africa
E. Guinea
Source Deutsche Bank, 7 December 2006
48
A Virtuous Circle Inter-emerging market trade
Africa is upstream of China
US bn
Source CEIC, Deutsche Bank, December 2006
49
Risk
50
Risk Standard Deviation
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Risk Standard Deviation
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Risk Diversification
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Risk Diversification
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Risk Diversification
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Risk Diversification
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Risk Diversification
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Risk Diversification
58
Risk Valuations
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Risk Valuations
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Optimism Tyranny of the News
Source Human Security Centre
http//www.humansecurityreport.info/HSR2005_PDF/Pa
rt1.pdf
61
Optimism Tyranny of the News
Source Human Security Centre, UBC
62
Optimism Tyranny of the News
Source Human Security Centre, UBC
63
Optimism Fewer Conflicts
Source Human Security Centre, UBC
64
International Wars are low Historically
Source Human Security Centre, UBC
65
Fewer CrisesFewer Deaths
Source Human Security Centre, UBC
66
Genocide and Politicide are down
Source Human Security Centre, UBC
67
More Peacekeepers and Tribunals
Source Human Security Centre, UBC
68
Optimism Democracy Prosperity reduce War
Source Human Security Centre, UBC
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Emerging Countries Under 10,000 GDP/capita
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Economic Freedom The Heritage Foundation

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Economic Freedom The Heritage Foundation

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Economic Freedom Frontier Markets are
improving 2000-2007 Developed 3.6, Emerging
-0.8, Frontier 2.0

• .

Frontier Market Average
Emerging Market Average
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Economic FreedomThe Heritage Foundation

• .

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Corruption is a problem in many Frontier Markets,
but it is also a problem in Russia, the
Philippines, Argentina, India and China And
frontier counties are improving scores up 3.9
from 2000 to 2005, versus a drop of 0.1 in
emerging markets
Source Transparency International, 2006
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Red TapeEfficient is Good. Improvements in
Indonesia, Peru, India, China, Mexico Czech
Republic
2005
2006
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5 Opportunities?
DEVELOPED
DEVELOPED
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5 Opportunities?
DEVELOPED
DEVELOPEDC
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5 Opportunities?
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5 Opportunities?
DEVELOPED
DEVELOPED
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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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Optimism Determination
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Spirit
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Whats Emerging in Emerging Markets

• History
• The Past is Prologue
• Globalization
• Demographics
• Internet
• Jobs
• Middle-Class
• Risk
• Diversification and Risk are Opposites
• Optimism
• The World is NOT going to _at_?!! in a hand-basket

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Tomorrow is Coming Fast
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The Beauty Contest

• Professional investment may be likened to those
  newspaper competitions in which the competitors
  have to pick out the six prettiest faces from a
  hundred photographs,
• the prize being awarded to the competitor whose
  choice most nearly corresponds to the average
  preferences of the competitors as a whole

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The Beauty Contest The General Theory John
Maynard Keynes, 1936

• so that each competitor has to pick, not the
  faces which he himself finds prettiest, but those
  which he thinks likeliest to catch the fancy of
  the other competitors, all of whom are looking at
  the problem from the same point of view.
• It is not a case of choosing those which, to the
  best of one's judgment, are really the prettiest,
  nor even those which average opinion genuinely
  thinks the prettiest. We have reached the third
  degree where we devote our intelligences to
  anticipating what average opinion expects average
  opinion to be.

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Terrorism is up
WTC
African Embassies
Source Human Security Centre, UBC
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Emerging Countries Under 10,000 GDP/capita
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Emerging Countries Under 10,000 GDP/capita
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Emerging Countries Under 10,000 GDP/capita
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Emerging Countries
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The Investment Case Why Africa?
Once a vicious circle now a virtuous circle

• Increasing political stability
• Highly varied economic development
• Investing windfall commodity gains prudently
• Corporate governance focus on sustainable
  development projects

An unexamined opportunity
Map source http//www.cia.gov/cia/publications/fa
ctbook/geos/tu.html
109
The Investment Case Why Africa?
Introducing Africa
Africa 7 Emerging Europe Africa as a of Emerging Europe
Population (mns) 359.8 239.9 150.0
GDP (US bns) 560.8 1,657.7 33.8
Africa 7 represents the 7 countries on this map,
Emerging Europe is Czech, Hungary, Poland,
Russia and Turkey Source EIU, OECD, IMF,
Bloomberg, Citigroup, World Bank
110
The Investment Case Why Africa?
Growth potential
of Global GDP
of Global Population
Market Cap/GDP (rhs)
The next frontier
GDP in Purchasing Power Parity Market Cap
as at January 2007 Source World Bank, Bloomberg,
Figures as at end December 2005
111
The Investment Case Why Africa?
Improving political and economic framework
Country Regular, non-violent elections Sustainable development Investable exchanges and attracts foreign listings
Botswana ? ? ?
Egypt ? ?
Ghana ? ?
Kenya ? ? ?
Lesotho ?
Malawi ?
Mauritius ?
Morocco ? ?
Mozambique ?
Namibia ?
Nigeria ? ?
South Africa ? ? ?
Tanzania ?
Source Charlemagne Capital
112
The Investment Case Why Africa?
Growth is accelerating
Strong long-term growth
Figures are an average for Sub-Saharan
Africa Source IMF, September 2006
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The Investment Case Why Africa?
Africa is upstream of China
US bn
Source CEIC, Deutsche Bank, December 2006
114
The Investment Case Why Africa?
What China needs
Source Deutsche Bank, 7 December 2006
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The Investment Case Why Africa?
Africa has to sell
Zambia DRC
Angola Cameroon E. Guinea Gabon Nigeria DRC
Ghana Niger South Africa Zimbabwe
Mauritania South Africa
South Africa
E. Guinea
Source Deutsche Bank, 7 December 2006
116
The Investment Case Why Africa?
Re-investing commodity wealth
Self-funded investment growth
Figures are an average for Sub-Saharan
Africa Source IMF, September 2006
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The Investment Case Why Africa?
Rising income levels
Increasing Consumption
Figures are an average for Sub-Saharan
Africa Source IMF, September 2006
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The Investment Case Why Africa?
Inflation moderating
Improving economic stability
excluding Zimbabwe Source IMF, September 2006
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The Investment Case Why Africa?
Improving fiscal balances and reserves
Improving fiscal management
Fiscal Balances are for Sub-Saharan Africa,
excluding grants and shown as of GDP
Reserves are shown as months of imports of goods
and services for Sub-Saharan Africa Source IMF,
September 2006
120
The Investment Case Why Africa?
Repaying external debt
Improving governance
Figures are an average for Sub-Saharan
Africa Source IMF, September 2006
121
The Investment Case Why Africa?
Case Study Nigeria oil windfall gains

• Excess crude account captures gains above
  US40/bbl
• Size estimated to be US42bn, equivalent to 35
  of GDP
• Earmarked for specific infrastructure projects
  (rail, roads and ports)

Following Russias example
Source Citigroup, November 2006
122
The Investment Case Why Africa?
Case Study South Africa speed of income
redistribution
Real GDP CAGR (95 05) 3.3.
Income redistribution at faster pace
Proportion of population in each category
High relative living standards
Low relative living standards
Growing middle class
Note LSM living standard measure the higher
the number, the better the standard of
living Source SAARF, UBS, January 2006
123
CCL investment process applied to Africa
Ongoing portfolio construction

• Screening down
• approx 7 countries
• approx 450 companies
• approx 130 companies
• 50 60 companies
• 20 30 companies

Current coverage South Africa, Egypt, Morocco
Off-shore Africa 70 40 10
Development steps Identifying countries Liquidity
screen Qualitative screen CCL Universe Model
portfolio
Disciplined screening
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The Investment Case Why Africa?
Investable universe initial screening

• Markets must meet threshold criteria including
• Security of ownership
• Currency convertibility
• Custody
• Taxation
• Liquidity

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The Investment Case Why Africa?
Investable universe Geographic breakdown
Companies with a market capitalisation in excess
of US 100mn
Country No. Investable companies
Botswana 10
Cote d'Ivoire 3
Egypt 70
Ghana 10
Kenya 20
Mauritius 10
Morocco 30
Nigeria 30
South Africa 170
Tunisia 10
Zambia 5 10
Zimbabwe 10
Offshore listed 50 100
Total opportunity set 428 483
excludes offshore listed companies Total Market
Capitalisation US 500bn
Large investment universe
Source Bloomberg
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The Investment Case Why Africa?
Investable universe Sector breakdown
Companies with a market capitalisation in excess
of US 100mn
More than just a commodity story
excludes offshore listed companies Source
Bloomberg
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Economic FreedomTha Frazer Institute

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128
Optimism
129
Globalization Quality Products
World Class Production
130
Education Jobs Middle Class
131
Peraliya, Sri Lanka
132
Education Jobs Middle Class
133
Globalization Jobs
Source The World is Flat, Thomas Friedman, 2005
134
Fewer Conflicts
Balkans
Source Human Security Centre, UBC
135
Fewer Conflicts
Central America
Source Human Security Centre, UBC
136
Fewer Conflicts
Source Human Security Centre, UBC
137
Fewer Conflicts
Caucasus
Source Human Security Centre, UBC
138
Emerging Countries Under 10,000 GDP/capita
139
(No Transcript)
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Latin America is Elitist
141
Government Small is Good. Turkey Mauritius
13.1
Source Global/WDI/Map0602
142
Corruption
Ambev buyout by Interbrew
143
CALPERS Beauty Scores

• Seven Factors
• Country
• Political Stability,
• Transparency,
• Labor Practices
• Market
• Liquidity/Volatility,
• Regulation/Investor Protection,
• Openness,
• Settlement Proficiency/Transaction Costs
• Scores (1Lowest, 3Highest).
  Acceptable Overall 2

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CALPERS Beauty Scores

• Counter-productive.
• Suitability and Opportunity are INVERSLY related

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The Beauty Contest Price/book
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The Beauty Contest Price/Earnings Ratio
147
The Beauty Contest ROE PB / PE
148
The Beauty Contest Competition for Capital
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The Beauty Contest Competition for Capital
150
And the Winner is
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And the Winner is
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And the Winner is.
Source 991214PB PE ROE for Dev and EM 060130
153
The Beauty in Emerging Markets

• Diversification means owning things we hate to
  hold
• Conflicts are diminishing
• Economics are improving (lower taxes, more
  incentives)
• Education for all
• A rising middle class
• Beauty is in the Eye of the Beholder

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Economic Freedom The Heritage Foundation

• .

Global/HeritiageEconomicFreedomIndex_2005.xls
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The Beauty in Emerging Markets

• Diversification means owning things we hate to
  hold
• Supply-side Economics are gaining ground
• Outsourcing is accelerating (Western profits from
  emerging markets production)
• The demographic imperative
• Rising middle class

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Growing Investment
Source World Development Indicators, 2005
WDILiteracy0509
157
Poor
Source World Development Indicators, 2005
WDICharts200509
158
Rural
Source World Development Indicators, 2005
WDILiteracy0509
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Harsh
162
Optimism Fewer Conflicts

• Conflicts
• Sri Lanka Tamil Tigers (ceasefire in 2002?)
• India/Pakistan peace overtures, nuclear risks
• South Korea/North Korea nuclear risks
• Iraq nuclear risks
• Israel/Palestine/Lebanon/Irag - terrorism
• China/Taiwan sword rattling
• Russia/Chechnia terrorism
• Mexico drug wars
• Turkey Kurds
• Spain Basques
• Italy Mafia
• US Al-Qaeda

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Trust is related to income and cultural history
Democracy Trust, Mark Warren, 1999
164
The Critical Middle Class
Source World Development Indicators, 2005
WDILiteracy0509
165
The Critical Middle Class
Source World Development Indicators, 2005
WDILiteracy0509
166
Falling Dependency
167
Globalization Rising Middle Class
China consumes a lot. But Chinese are becoming
consumers
168
Globalization - Performance
Source Laffer Associates, as of 3/06
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Government Taxes
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Government Taxes Supply-side Economics

• Rise Taxes More tax revenue, less crowding out,
  lower interest rates, more growth
• Lower Taxes More incentive to work, more
  workers, more growth, higher tax revenues

The Laffer Curve
Tax Rate
Tax Revenue
172
Lower Taxes Higher Revenues Growth
173

• Tax Wedge Marginal Inc Tax Rate (State
  Local) (Employee Employer Social Sec)

174

• Tax Wedge Marginal Inc Tax Rate (State
  Local) (Employee Employer Social Sec)

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Lower Taxes Higher Revenues Growth
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What is Beautiful?GDP droves HDRSome countries
lead, others lag
Source World Development Indicators, 2005
WDICharts200509
177
What is Beautiful?Human Development is good but
not for Growth
Source World Development Indicators, 2005
WDICharts200509
178
What is Beautiful? Improvement in Human
Development is good
Source World Development Indicators, 2005
WDICharts200509
179
What is Beautiful?Human Development is good but
not for Growth
Source World Development Indicators, 2005
WDICharts200509
180
What is Beautiful? High Cost of Doing Business
Good?
Source World Bank, World Development Indicators,
2005 WDICharts200509
181
What is Beautiful? Lower Taxes are Good!

Zero in Bahamas, Bahrain, Bermuda, Cayman Isl,
Kuwait, Saudi Arabia
Source World Development Indicators, 2005
WDILiteracy0509
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What is Beautiful? Lower Taxes are Good!!
Also Zero in Bahamas, Kuwait
Source World Development Indicators, 2005
WDILiteracy0509
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What is Beautiful? Small Shrinking Government
Source World Development Indicators, 2005
WDILiteracy0509
184
What is Beautiful? Not Corruption
Russia
Source The Economist 3/7/02
185
What is Beautiful? Improved Schooling for Women
is Beautiful
Some of the worst countries had high growth but
improvement mattered
Source World Development Indicators, 2005
WDILiteracy0509
186
What is Globalization? Diversification
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Corruption
Ambev buyout by Interbrew
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Globalization
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Lower Taxes More Growth Employment

• Tax Wedge
• Marginal Income Tax Rate
• (State Local)
• (Employee Employer Social Sec)

Source OECD
190
Small Government
Source Global/WDI/Map0602
191
Beauty and the Beast The Age of the Cynics
2000 - ? Some countries learning the wrong
lessons

• Xenophobia, nationalism (Malaysia, Russia, Iran,
  Iraq, Cuba)
• Isolationism (Malaysia)
• Restrictions on currency and investment flows
  (Malaysia)
• Competitive devaluations (Brazil)
• Protectionism (China)
• Market Manipulation (Hong Kong)
• Rising crime, drug trade (Mexico)

192
Improved Schooling for Women is Beautiful
Source World Development Indicators, 2005
WDILiteracy0509
193
Corrupt
but improvement mattered
Some of the most corrupt countries had high
growth
Source World Development Indicators, 2005
WDILiteracy0509
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Small Government
Source World Development Indicators, 2005
WDILiteracy0509
195
Tax Cuts
196
Growing Investment
Source World Development Indicators, 2005
WDILiteracy0509
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And the Winner is.
198
Emerging Countries Opportunity
Population
Gross National Product
Market Cap
Developed (ex U.S.) 11
United States 45
United States 27
United States 5
Emerging 11
Emerging 84
Developed (ex U.S.) 53
Emerging 20
Developed (ex U.S.) 44
Source SP MSCI see additional disclosure As
of 2002
199
Frontier Market Select Fund
Demographics are favorable Developed countries
are aging, frontier countries are young

• .

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Globalization Outsourcing Production Services

• Economists and Accountants dont agree on
  Globalization For a Dell PC sold in San Diego

Source GaveKal Research, HaverJobs file
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Corruption

• Pakistan Brazil
• at a 30-50 Discount

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Corruption
Source World Development Indicators, 2005
WDILiteracy0509
203
Dangerous

• Murder Rates
• Jamaica 59 per 100,000 residents
• Sao Paulo - 66
• South Africa 43 (down 12 since 2001)
• Brazil 24
• Russia 18
• Mexico 14
• New York 8.7
• Washington, D.C. 41.8
• Gary, Indiana - 68

Source Economist 2005