Look out, BRICs, here come the TIMPs A position paper by Bob Turner, chairman and chief investment officer First quarter 2013

Look out, BRICs, here come the TIMPs Our position in brief The economies of the BRIC nations – Brazil, Russia, India, and China – have grown robustly in the past decade, albeit not without some disappointing setbacks along the way. But we believe there’s much more growth in store for the BRICs in the decades ahead. At the same time we believe four emerging nations could be the next BRICs: Turkey, Indonesia, Mexico, and the Philippines, which we dub the TIMPs.

t age 24 Orson Welles directed Citizen Kane, regarded as one of the great films of all time. Alas, Orson Welles spent the

rest of his career trying to live up to Hollywood’s early expectations; by the age of 40 he was widely considered a has-been – a gifted actor, writer, producer, and director who never quite fulfilled the potential he displayed as a young man. Similarly the BRICs nations – Brazil, Russia, India, and China – were saddled with high expectations as global economic leaders years ago. Their economic performance since 2000 has been on balance superior but also something of a disappointment, impaired by imbalanced economies, political corruption, and poor demographics. As for the future, we think the BRICs face unique challenges and opportunities as they evolve from emerging nations into countries in a more mature phase of economic development. We believe other emerging nations are poised to challenge the BRICs over the next 30 years – and in the process inspire an acronym denoting their status as a new engine of global economic growth. BRIC: a timely acronym In 2001 Jim O’Neill, an economist at Goldman Sachs, coined the term BRICs in a paper Building Better Global Economic BRICs. The term caught on, and the BRICs dominated discussions on Wall Street of global growth and emerging-markets investing.

Jim O’Neill’s bullish outlook on the BRICs was right on the money, for the most part. The economies of the BRICs grew at an average annual rate of 6.6% from 2001 to 2010, nearly twice the rate of the global economy and about four times the rate of the U.S. economy, according to the International Monetary Fund. The BRICs’ collective economy grew as much as 9.7% in 2007. But in the past two years the BRICs’ above-average growth rate declined slightly. The BRICs collectively grew 6.3% from 2011 to 2012. Eager to get in on the action when the BRICs’ growth was ample, global investors pushed a big pile of money into the four nations. From 2001 to 2010 about $15 billion was channeled into stock funds that invested in Brazil, Russia, India, and China, and another $52 billion was invested in funds focusing on individual BRICs, according to research firm EPFR Global. BRICs faded As the BRICs’ economies flourished, their stock-market performance soared. The MSCI BRIC Index returned 424% cumulatively from 2001 to 2010, compared with a 44% gain for the MSCI All-Country World Index and a 14.7% gain for the S&P 500 Index. But in the past two years the MSCI BRIC Index has declined a cumulative 12.62%, and some global investors have soured on their former darlings, like bicycle-racing fans repudiating Lance Armstrong. In 2012 mutual funds that invest in the BRICs suffered outflows of $1.7 billion, even as emerging-markets funds gained $70 billion in new investment, according to EPFR Global. Even the term BRIC itself is fading from popular consciousness. In January the number of news stories about BRICs plummeted to 317, or 87% below its peak of March 2011. And the term BRIC is being searched for on Google about half as often as it was at its June 2009 height. So are the BRICs yesterday’s news?

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Look out, BRICs, here come the TIMPs / 2 __________________________________________________________________________ Not in our opinion. We think Jim O’Neill’s call on the BRICs was sound, even if these four nations haven’t fully delivered on the promise they showed in the 2000s. And for the most part, they remain places that global investors are considering if they’re seeking high-return potential in stocks. Here’s our analysis of how Brazil, Russia, India, and China have fared economically in recent years and could fare going forward: Brazil: the economic Boz If Brazil could be likened to an NFL player lately, it might be the notoriously underachieving Seattle Seahawks linebacker Brian Bosworth. Like The Boz, Brazil has all the tools – a deep supply of natural resources, a strong demographic profile, and a growing middle class. So why has Brazil lately been unable to put it all together? For much of the past decade Brazil’s gross domestic product (GDP) grew on average at a solid 4.5% annual rate, abetted primarily by global demand for the country’s commodity trove of oil, copper, and iron ore, among other things. With its commodities bounty and desirable demographics, Brazil’s growth was widely expected to go through the roof. But last year its GDP grew only 0.9%, and Brazilian stocks fell 6%. So, what gives? Why the sudden slide in performance? Part of the answer is Brazil’s imbalanced economy. Brazil’s growth depends heavily – too heavily, its critics say – on commodities, which represent two-thirds of Brazil’s total exports. A lackluster global economy lowered foreign demand for commodities and left the Brazilian economy exposed as too dependent on exports. Also impairing Brazil’s growth has been the heavy hand of government. Brazil’s byzantine tax code and extensive regulations inhibit foreign trade and investment; indeed, Brazil ranks last for ease of doing business in Latin America, the World Bank reports. Brazil’s tax burden on individuals and business rose to 36% of GDP in

2012, up from 22% in 1988. And starting a business in Brazil involves navigating a frustrating bureaucratic labyrinth: it takes 13 filings and 119 days on average to become a government-approved entrepreneur in Brazil, according to the BBC. Foreign investment growing But the news isn’t all downbeat in the land of Carnival and the samba. Foreign direct investment in Brazil surged to $67 billion in 2011, a new record. Brazil’s middle class added 40 million people between 2003 and 2011, a consumer base that should help curb the nation’s reliance on exports. And the unemployment rate dropped to 5.5% in 2012, the lowest since 2002, according to the Brazilian Institute for Geography and Statistics. Also, a long-decried obstacle to Brazilian economic growth – a dilapidated infrastructure – is getting a much-needed overhaul. Only 14% of Brazil’s roads are paved, so the government is pouring $80 billion into building highways. This spending will be critical to the success of a pair of world-class events to be held in Brazil, the 2014 World Cup soccer championships and the 2016 Summer Olympics, which are estimated to require $12 billion in spending on their own. Brazil’s working-age population and total population should continue expanding until about 2050, due to a sustained birth rate, according to research firm ISI. And that population is growing more educated. The proportion of the population with a secondary education more than doubled from 1970 to 2010, from 20% to 50%. In our estimation, that bodes well for greater affluence and economic diversification in Brazil in the years ahead. Russia looking a bit fragile Once-mighty Mother Russia at times is looking more like Old Mother Hubbard and her empty cupboard in terms of economic opportunity. The problem mainly is the energy industry’s domination of the Russian economy; 35% of the Russian government’s budget is funded by oil

Look out, BRICs, here come the TIMPs / 3 __________________________________________________________________________ and natural gas. And because that budget is growing, revenue from oil and gas need to keep pace. Last year Sergei Aleksashenko, a former deputy central bank governor, told the Financial Times that the price of a barrel of oil would need to increase by $10 to $15 a year to finance Russia’s fiscal needs in the near term. When you consider the reduced demand for oil and natural gas by the European Union and the United States, which is benefiting from a shale-gas boom, it doesn’t take a Grigori Perelman, Russia’s brilliant mathematician who has revolutionized geometry, to conclude that his country’s future as an energy exporter is problematic. Russia’s economic prospects darken further when you examine Russia’s demographics. They’re so bleak that they prompted Dick Hokenson, ISI’s demographics guru, to declare that “Russia is sick and dying – if it were Catholic, one would be tempted to call in the priest to administer last rites.” His grim conclusion is based partly on Russia’s abysmal mortality rate. Russian men between the ages of 25 and 54 are nearly twice as likely to die today as their fathers’ generation is. This is due to a high incidence of alcoholism and suicide among men 25 to 54 years old. Birth rate declining Not only are Russian mortality rates chillingly high, but Russian birth rates are abnormally low. Only about 30% of Russian children are born healthy, and 50% of Russian babies lack the iodine and calcium needed to prevent brittle bones and mental retardation. Also, in a reflection of a deeply flawed national health-care system, the average Russian can expect to live about 68 years – nearly 10 years less than a citizen of the European Union and the United States. As a result of these negative demographic trends, the Russian work force is shrinking. There simply aren’t enough able-bodied people available to power the economy. The problem is

so severe that the Russian armed forces have been compelled to recruit foreign nationals to remain at adequate strength. What’s more, Russia is rife with political corruption that hinders growth. Bribery is especially rampant; 15% of Russians paid a bribe to government officials in the past 12 months, according the Levada Analytical Center, a pollster. Russia was rated the most corrupt major nation and its corporate compliance with business regulations was deemed unsatisfactory by Transparency International in 2012. The Russian government has responded by creating a central clearinghouse that enables foreign investors to gain access to the Russian stock market without having to use a local broker, thus lowering their exposure to acts of broker skulduggery. And the Kremlin is funding startups of technology companies in what’s been called Russia’s Silicon Valley, the Skolkovo Initiative on the outskirts of Moscow. Such efforts appear to be helping: Russia’s financial-services sector is growing, ranking in the top 10 in financial-derivatives markets and the top 20 in stock trading, according to Bloomberg News. Overall, Russian GDP growth was 4.3% in both 2010 and 2011, slipped to 3.4% last year, and should remain at about that level in 2013, according to the World Bank. Russian unemployment reached a record low of 5.2% last September and hovers around 6% currently. But mere stable growth isn’t what the BRICs are supposed to deliver, and it seems to us that until more transparency in government and business is evident, Russia is destined to remain the black sheep of the BRIC family. India hits a lull After achieving about 8% GDP growth annually in much of the past decade, India has hit a lull. Growth slowed from 9.7% in 2010 to 5% last year, and industrial output fell from 9.7% to 0.7%. Output growth in India’s manufacturing industry plummeted from 10.5% in 2010 to 0.6% last year.

Look out, BRICs, here come the TIMPs / 4 __________________________________________________________________________ Also, foreign investors’ perception of India as highly fragmented and disorganized is hurting the nation’s prospects. For starters, India’s infrastructure is notoriously deficient, with woefully overcrowded trains, permanently snarled traffic, and city dwellers who steal electricity from neighbors with strategically placed extension cords. This negative perception was reinforced during the July 2012 blackout that plunged a tenth of the world’s population into darkness for two days. What’s more, there’s a troubling gender imbalance in India. Millions of female babies have been aborted for decades because of the social stigma attached to women. Between 1961 and 2011, the number of girls per 1,000 boys dropped from 976 to 914. And highly publicized incidents of violent crimes against women recently have done little to assuage external concerns about India’s social progress. Infrastructure being upgraded Despite all this, we think that as the twin bottlenecks of infrastructure problems and social inequality are gradually unclogged, India will be a stronger economic performer. For instance, infrastructure improvements, including the expansion of the Golden Quadrilateral highway network connecting India’s four largest cities of Delhi, Mumbai, Kolkata, and Chennai should go a long way toward enhancing the nation’s transportation and shipping networks. Such highway projects should spur continuing job growth, along with orders for steel and concrete. Demographically, India is now where China was about 10 years ago. That’s not at all a bad position to be in, when you consider China’s explosive growth over the past decade. India contains 17.5% of the world’s population and is projected to surpass China as the world’s most populous nation by 2025, according to ISI. India’s population is young, with 65% of Indians below the age of 35. One million Indians per month are projected to join the workforce over the next 10 years, which augurs well for the nation’s economic growth, in our judgment.

Finally, India has been proactive in making itself more investor friendly. Last year the government made it easier for foreigners to invest in India’s retail and aviation industries and is looking to do the same for the insurance and pension industries. That helps explain why international investors bought $25 billion worth of shares in Indian companies last year, the second-most of any Asian nation, according to Bloomberg News. China: the keystone BRIC China has truly been the class of the BRIC nations since 2000. It’s the world’s fastest growing major economy, averaging double-digit annual growth. In fact, global economic growth has become so dependent on China that when the country’s GDP-growth rate slipped to 7.8% last year, economists and investors fretted palpably. This slowdown is a byproduct of the transition underway in China from a manufacturing-based to a consumption-based economy. With that transition have come growing pains; China’s GDP grew 7.7% in the third quarter, down from 7.8% in the second quarter. That marked the seventh-straight quarter of flat or declining growth. But the Chinese economy ticked back up to 7.8% growth in the fourth quarter. We think this slowdown was temporary, and future growth should be fueled by consumption in mid-tier cities and the Chinese heartland. Major cities like Beijing and Shanghai are passing the growth torch to their smaller (but still large) inland neighbors, which should benefit from new access to high-speed trains and highways built with government-stimulus money. Also, the Chinese middle class continues to expand rapidly; it now numbers about 300 million people – the equivalent of the entire U.S. population. We estimate the Chinese middle class should reach 1.4 billion by 2030. Don’t rock the boat We believe the new Chinese government regime, led by incoming president Xi Jinping, doesn’t want to shake things up but to instead maintain

Look out, BRICs, here come the TIMPs / 5 __________________________________________________________________________ economic stability; the last thing that China needs now is a tenuous economy. Also, remember that China’s economic slowdown was largely by design: the Chinese government clamped down on construction and took other steps to keep the economy from overheating, in an effort to stave off inflation and boost domestic consumption. On the minus side, there are concerns about China’s demographic profile. China’s working-age population should peak next year and is projected to shrink 1.6% by 2020 and could continue declining over the next 40 years, according to ISI. A shortage of qualified workers has led to wage inflation, which has hampered China’s ability to remain a low-cost producer of goods. But don’t include us on the list of China doubters. We think there are too many positive economic signs in China to believe that its days as a global economic force are over. As we see it, the Chinese economy can grow in the high single digits annually for many years to come. And we aren’t the only ones who believe that; Bloomberg, for example, has forecast China’s GDP to grow 46% between now and 2017. When it comes to the economic prospects of the BRICs, we think the proverb Don’t look a gift horse in the mouth applies. To be sure, the BRICs have had their setbacks – show us a country that hasn’t – but they’re still in position to be among the leaders in global growth in the years ahead. But to us, the more important question is this: are there other countries that could join their ranks? Since 2001 economists, market strategists, and journalists have scrambled to come up with a defining acronym for the group of emerging nations that could succeed the BRICs as economic pacesetters. They’ve scoured the Pacific Rim, Africa, and South America for unlikely combinations like MIST, CARBS, CASSH, and VISTA, to name a few. In this paper we’re throwing our hat in the ring. We’ve

identified four countries that we believe could be the next global growth hubs: Turkey, Indonesia, Mexico, and the Philippines, or – trumpets, please – the TIMPs. Granted, TIMPs doesn’t exactly roll off the tongue. But in the end we’re more concerned with identifying the emerging nations that will in fact grow the fastest than we are with creating a snappy acronym. Here’s why we think the TIMPs’ economic growth could exceed that of the BRICs in the years ahead: Turkey: location matters Location, location, location – in many ways, Turkey represents the best of all worlds geographically. Turkey’s locus between eastern Europe to the west, Russia to the north, and the Middle East to the east has made the nation a lively hub for international trade over the centuries. Today Turkey’s proximity to those regions continues to make the nation an appealing place to conduct commerce and invest. In recent years Turkey’s economic growth has been bumpy but generally favorable: an average of 6% GDP growth between 2002 and 2008, a 4.8% decline in 2009 due to the global financial crisis, 9.2% growth in 2010, and an 8.5% increase in 2011. The final GDP statistics for 2012 aren’t yet available, but estimates have put them around 3%, and in 2013 the Turkish economy should expand by 3.5%, putting it ahead of other emerging economies like Poland and South Africa, according to the International Monetary Fund. Recent economic growth has been such that it inspired The Economist to dub Turkey the “Hottoman empire.” We think Turkey should remain hot, due partly to an enviable demographic profile: more than half of Turkey’s population of 75 million is under the age of 30. And young people in Turkey are becoming more educated, with the number of college graduates soaring by 155% between 2000 and 2010, according to Business Insider. Also, Turkey has developed a robust tourist industry, generating

Look out, BRICs, here come the TIMPs / 6 __________________________________________________________________________ revenue of more than $22 billion annually, and a major automotive industry, the world’s 16th largest, producing 1.1 million vehicles last year. Indonesia: a giant awakens The world’s fourth-largest nation by population, Indonesia is truly a sleeping giant . . . and stirring. Indonesian economic growth surpassed that of every Asian country except China in 2012. We think that strong relative performance should persist, as President Susilo Bambang Yudhoyono increases infrastructure spending to more than $21 billion in the hopes of meeting his GDP-growth goal: an average of 6.6% by 2014. Indonesia’s trump card is that its economy is propelled by domestic consumption to a greater degree than the economies of its Pacific Rim neighbors. Private consumption accounted for about 47% of Indonesia’s 6.2% rate of GDP growth in the fourth quarter, led by Indonesia’s rising middle class of 130 million people. Impressed by that rising middle class, international investors appear to be looking at Indonesia favorably. Foreign direct investment in Indonesia reached a new high in the fourth quarter: $5.9 billion, a 22.9% increase from a year earlier. For the entire year, foreign direct investment was $22.8 billion, a 26.7% increase from 2011. In our opinion, investment should remain strong, given that the country’s credit rating was recently elevated to investment grade by Fitch Ratings and Moody’s Investors Service. Mexico: new Middle East? At last year’s Summer Olympics, Mexico defeated Brazil in men’s soccer, 2-1. This defeat has a parallel on the economic field, as Mexico has surpassed Brazil in GDP growth, with gains of 3.9% in the past two years, versus Brazil’s 2.7% in 2011 and 0.9% last year. Mexico’s growth is expected to accelerate, prompting Goldman Sachs to predict that the nation will become the world’s fifth-largest economy by 2050.

Like Turkey, Mexico enjoys a central trading location, with the U.S. and Canada to the north and swiftly growing South America below. International trade contributes 60% of Mexico’s GDP. Mexico has also morphed into something of a manufacturing powerhouse, the world leader in the production of flat-screen televisions, for instance. The nation’s entire manufacturing market was $300 billion in 2012, and we think it should continue growing at annual rates in the high single digits or more in this decade. In 2013 all eyes are on Mexico’s new president, Enrique Peña Nieto, as he moves to reform the country’s privately run energy sector. President Nieto wants companies, financial institutions, and other investors (rather than the government) to largely finance Mexico’s energy development going forward. However, he must first navigate considerable cultural resistance; this is a country, after all, where the privatization of Mexico’s oil industry in 1938 is celebrated as a national holiday. But if he’s successful, we think the potential of the Mexican economy will be greater than ever. We think it’s significant that Emilio Lozoya, chief executive officer of Pemex, the state-owned oil company, called Mexico the “new Middle East” in light of its long-term prospects as an energy producer. Philippines prospects soar Until recently there was a dearth of foreign direct investment in the Philippines, averaging just $1.5 billion annually. But we think this scenic island nation finally is ready to meet the mostly unfulfilled expectations many have held for it since the Ferdinand and Imelda Marcos era of the 1980s. The Philippines is benefiting from low inflation (about 3%) and high GDP growth (about 6%). We think that pattern should remain in place for the next three years. The Philippine economy is the world’s 44th largest, according to HSBC, a financial firm. And if current economic-growth trends continue to play out (as we think they will), the Philippines should jump to 16th place by 2050, according to The New York Times. Among the

Look out, BRICs, here come the TIMPs / 7 __________________________________________________________________________ country’s economic catalysts should be money transfers and customer-service call centers. About 10% of Filipinos working abroad send payments home ($20 billion worth of payments in 2011, up from $7.5 billion in 2003). And offshore call centers in the Philippines generated about $11 billion in revenue in 2011. The Filipino government is hoping to raise that $11-billion number to $25 billion by 2016, in part by taking jobs away from India. In fact, last year the Philippines captured 70,000 call-center jobs formerly based in India. Demographically, the country is sitting pretty. Catholicism is strong in the Philippines – 75.5 million strong – and large Catholic families have helped the Philippines avoid the demographic fate of a rapidly aging China. About 94 million people live in the Philippines, with an average age of 23. Population there is expected to total 142 million by 2040, which would give the Philippines a labor force encompassing 61% of the population. In contrast, the percentage of the population that works in Japan is expected to drop to 53% by then.

n sum, in the years ahead, we look forward to following what we think will be the economic success story of the TIMPs –

Turkey, India Mexico, and the Philippines. Even so, in spite of short-term challenges, the BRICs – Brazil, Russia, India, and China – should remain critical to global growth for a long time to come, in our judgment. But we firmly believe that, unlike Orson Welles’ movie career, the TIMPs should fulfill their own potential as rising economic juggernauts. The views, opinions and content presented are for informational purposes only. They are not intended to reflect a current or past recommendation; investment, legal, tax, or accounting advice of any kind; or a solicitation of an offer to buy or sell any securities or investment services. Except as otherwise specified, any companies, sectors, securities, and/or markets discussed are solely for illustrative purposes regarding economic

trends and conditions or investment process and may or may not be held by Turner, the Turner Funds, or other investment vehicles or accounts managed by Turner or its affiliates. Past performance is no guarantee of future results. Turner Investments refers to Turner Investments, L. P., its subsidiaries, and affiliates. Nothing presented should be considered to be an offer to provide any Turner product or service in any jurisdiction that would be unlawful under the securities laws of that jurisdiction. Turner Investments, founded in 1990 and based in Berwyn, Pennsylvania, is an investment firm with more than $10 billion in assets under management in stocks, as of December 31, 2012. Turner manages growth, global/international, and alternative separately-managed accounts and mutual funds for institutions and individuals.

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