2007 to 2014 : Emerging Markets Importance to Global GDP Growth

1. 2007 to 2014 : Emerging Markets Importance to Global GDP Growth Chris Taylor, Investment Director & Head of Research Neptune Investment Management

2. Why Investors Must Think Global • World is now multi-polar & growth is driven by inter & intra regional trade • Major trade flows: BRIC to neighbours; BRIC to BRIC; BRIC to OECD • Global industry leaders now found anywhere in the world • Reflects structural shift in supply chains & manufacturing to cheapest locations • Historically & currently non-OECD vs. OECD economies differ e.g. consumer = c.40% vs. c.70% • Exposure to both allows better risk management and portfolio diversification The Global Economy Has Evolved Source: Neptune Economics

3. Why Emerging Markets? • Emerging economies continue to drive global growth • Changing global economic balance of power → wealth transfer to EM • Increasing importance of trade between emerging market blocs • Low household debt, strong corporate balance sheets, stronger fiscal positions • Ongoing structural shifts in emerging markets → driving growth forward • Population effects → demographic dividend • Infrastructure demand → to meet growth and replace obsolete equipment • Power investment → critical to facilitate ongoing economic growth • Rise of the consumer → growth of the middle class and increasing income • Resource intensive → convergence of resource intensity per capita The Long-Term Case for Investing in Emerging Markets Remains Intact

4. The Global Environment • BRICs have critical mass & economic momentum • Differ in economic structure from OECD countries • Low financial risk = less debt, more equity & structurally lower inflation • Companies and economies more open & better managed than previously • What is the best approach? • Global sector based research essential to identify future sector & stock opportunities • Blend global equity and other asset classes to match risk appetite • Efficient diversification = concentrated portfolios Go ‘Global Unconstrained’ to Improve Diversification & Investment Returns

5. Global Demand – The Shifting Balance Comparative proportion of global GDP* The balance of global activity is shifting visibly to the naked eye Source: *at market exchange rates, IMF

6. Real Global Growth Forecasts (%) Economic forecasts point to emerging economies for growth potential Source: Neptune Economics Team, September 2009 Please remember that forecasts are not a reliable indicator of future performance. The forecasts are Neptune’s personal views and as such this document is deemed to be impartial research. We do not undertake to advise you as to any change of our views.

7. Global GDP Forecasts - Methodology & Objectives • Discover assumptions behind IMF WEO April 2009 forecasts • Based on GDP/components data : UN statistics division 1970-2007 • Calculated historic compound growth rates (CGRs) over 80s; 90; 00s • Then forecast Real & Nominal $bn GDP figures 2008-2014 • Fine tuned country forecasts using Neptune predictions • Identify future distribution of Global GDP growth • Assumed Emerging Markets = those outside of the OECD • Carried out on National, Regional & Global, and Supply & Demand Basis

8. Preliminary Findings • Focused on nominal $ figures – best proxy for corporate revenues • Supply side $bn national GDP generally bigger than Demand $bn value • 2007 base year, some rounding errors, other activities = services • Absolute closest fit to IMF forecasts to 2014 • Neptune forecasts (US, UK, Japan, France, Germany, BRICs) • Other OECD countries included at half their historic CGRs • Other non-BRIC, non-OECD countries flat in 2009; historic rates 2010 onwards • 2008-2010 assumptions have the biggest impact on estimated GDP growth • Neptune forecasts lower OECD consumption but are more optimistic on BRIC growth

9. Global GDP – Demand Side 2007 vs. 2014 • Global GDP grows $24 trillion to $30trillion • 64% developing vs. 36% developed • $15tn to $22tn demand from developing nations • $8tn+ from developed countries • Growth rate of developing nations double that of developed ones • By 2014 export/import values same • By 2014 Gross Fixed Capital same Source: Neptune Economics; please remember that forecasts are not a reliable indicator of future performance. The forecasts are Neptune’s personal views and as such this document is deemed to be impartial research. We do not undertake to advise you as to a change of our views.

10. Global GDP – Supply Side 2007 vs. 2014 • Same pattern as demand side • Developing growth rate 5xdeveloped • Agriculture & manufacturing $bn increment 4x developed country $bn • Incremental manufacturing $6 trillion developing vs. $1 trillion developed • Implies that, sector by sector, the greatest growth potential exists in developing nations • Neptune global sector research confirms this Source: Neptune Economics; please remember that forecasts are not a reliable indicator of future performance. The forecasts are Neptune’s personal views and as such this document is deemed to be impartial research. We do not undertake to advise you as to a change of our views.

11. USA vs. China – Demand Side 2007 vs. 2014 • China more important than the USA • China $3.2tn to $3.7tn+ incremental demand vs. USA $2.3tn to $2.3tnonly • China’s growth 5x US sectors • China consumption increment $2.16tn vs. US at $1.89tn • US consumption 2007 $12tn; China $1.69tn • 2014 China Gross Capital Formation bigger than the US • 2014 China’s exports trade bigger than the USA Source: Neptune Economics; please remember that forecasts are not a reliable indicator of future performance. The forecasts are Neptune’s personal views and as such this document is deemed to be impartial research. We do not undertake to advise you as to a change of our views.

12. USA vs. China – Supply Side - 2007 v 2014 • China more important than USA • 2014 China manufacturing will be larger than the USA, $4.12tn v $2.0tn • China’s manufacturing increment 4x USA ($1.4tn vs. $0.16tn) • China’s construction is double the $ value increase of the USA • Wholesale trade increment is the same but US almost 4x larger in 2007 • Same with Other Activities (Services) but US 10x larger than China in 2007 Source: Neptune Economics; please remember that forecasts are not a reliable indicator of future performance. The forecasts are Neptune’s personal views and as such this document is deemed to be impartial research. We do not undertake to advise you as to a change of our views.

13. Financial Factors – Less Risk • BRIC countries grow at 5% to 10% p.a. • Mostly real, some inflation • Now better financed: equity/debt/FX reserves • Emerging markets debt to GNP % ratio (1998 vs. 2007) • Overall fell 39% to 31% • Domestic up 20% to 23% • Foreign down 19% to 8% • Paid down debt using current account surpluses Source: FT, EIU, JPMorgan

14. Huge transfer of wealth to Asia and commodity exports Non-OECD expansion driven more by equity than debt Foreign exchange reserves fund infrastructure improvement Latter will underwrite continued economic expansion by debottlenecking the economy, restraining inflation and raising employment Foreign Exchange Reserves vs. GDP Source: *Time Series Data, (Jan 09) **CIA World Factbook (Jan 09)

15. Emerging Economies: Structurally Sound – Low Inflation Old risk = high & volatile inflation of 20% to 40% • Reflected poor economic & corporate management (lower ROE) • Added to investment risk & undermined REAL returns Since 1998, inflation sustained drop of 6% to 8% • Driven by structural improvements in economy, companies & capital markets Source: IMF World Economic Outlook Database classification of emerging and developing countries and Neptune Economics (Jan 09)

16. Global Stockmarket Comparisons • Equally weighted calculations used as at Sept 2009 • Highest EPS growth outside OECD • Return on Equity (ROE) nearer OECD • P/E ratios nearer OECD Source: Neptune Economics; please remember that forecasts are not a reliable indicator of future performance. The forecasts are Neptune’s personal views and as such this document is deemed to be impartial research. We do not undertake to advise you as to a change of our views.

17. MSCI World vs. Emerging Markets Sector Returns • Indicative benchmark = 112%+ cumulative growth in UK retirement inflation* • 7/10 Emerging Markets sectors outperformed benchmark • 1 World sector outperformed benchmark; 3/10 lost money Source: *Neptune Research Jan 2000-Sept 2009; **Lipper as at 30.09.09

18. Take A ‘Global Unconstrained’ Approach • Global sector research and the understanding of the macro environment is essential to identify future sector and stock opportunities in any stockmarket • Exposure to both Non-OECD and OECD economies allows better risk management • High conviction, concentrated portfolios of c. 50 stocks that best represent the views of the Neptune research process Go ‘Global Unconstrained’ to Improve Diversification and Investment Return Potential

19. Neptune’s Investment Strategy • Keep portfolio focused on global sector leaders irrespective of country of origin • Neptune research process entirely dedicated to identifying such stocks • Global unconstrained approach to fully exploit investment opportunities across the globe

20. Appendices

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