THE WORLD, POWERED BY EMERGING MARKETS

1. Source: International Monetary Fund, World Economic Outlook Database, April 2019.2. Source: Drewry quarterly reports, IMF, Haver, Citi Research. As of February 2017.3. Source: UN Comtrade Database in USD, as of 31 December 2017.

GROWING IMPORTANCE OF EMERGING MARKETS IN GLOBAL GROWTH

59% of Global Growth Is Powered by Emerging Markets1

Over 55% of Emerging Markets’ Exports Are to the Emerging Economies2

Emerging Markets Developed Markets

For illustrative and discussion purposes only.

• 59% of the global growth is now powered by emerging markets and 55% of the exports from the emerging markets are to the emerging economies.

• Intra-emerging markets trades are rising and this makes emerging economies less vulnerable to external shocks especially those emanating from the developed markets. Yet, global emerging markets is an under-owned asset class.

EMERGING MARKETS ARE LESS RELIANT ON THE DEVELOPED ECONOMIESExports of Brazil, Russia, India & China to regions outside developed markets3

BRAZIL

66%RUSSIA

66%INDIA

58%CHINA

55%• More than half of the respective BRIC economies’ exports are to regions outside developed markets.

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LOCAL OPPORTUNITIES FOUND IN INDIVIDUAL EMERGING MARKETS COUNTRIES

QUALITY, UNDERVALUED BONDS FOUND IN EMERGING MARKETSIndex Yields of Select Countries4 As of 31 March 2019

MexicoA-

ColombiaBBB

BrazilBB-

South AfricaBB+

PeruA-

8.2%

6.0%

8.0%

9.3%5.5%

IndiaBBB-

IndonesiaBBB-

7.5%

7.8%

United States (AA+) 2.6%Japan (A+) 0.1%

N. Zealand (AA+) 1.9%Australia (AAA) 2.0%

For illustrative and discussion purposes only. Past performance is not an indicator nor a guarantee of future performance.

• Attractive yields can be found globally. This is especially true in select emerging markets that are fundamentally strong, but often overlooked by the markets. Yields are more attractive there compared to the developed markets.

• There are potential for yields compression in these economies as they have the right policy mix and reforms in motion.

EACH REGION IS DRIVEN BY DIFFERENT SECTORSSector Weights Across Emerging Market Regions5

As of 31 March 2019

19.5%

5.6%

19.5%

5.5%

19.6%

10.9%

0.5%

15.9%

7.0%

42.2%

0.0%

12.0%

3.7% 0.4% 0.0%

17.8% 15.7%

1.6% 0.0%

9.9%

Consumer Staples & Discretionary Energy Information Technology Materials

Asia Latin America Europe Arabian Markets Africa

For illustrative and discussion purposes only. Past performance is not an indicator nor a guarantee of future performance.

• The growth drivers across emerging market regions vary significantly. Technology sector is driven from Asia, while Europe is driven by the energy sector, and largely most regions have equally dynamic consumption and materials-based sectors.

• The more pertinent question is, which region will power the next global economic growth engine?

4. Source: FactSet, Standard & Poor’s Global Services (S&P). All data are based on the respective country Citigroup World Government Bond Index and do not represent any specific maturity. Credit ratings provided are S&P Foreign Currency and Local Currency Long Term issuer ratings. An index is unmanaged and one cannot invest directly in an index. 5. Source: FactSet, MSCI. Asia is represented by MSCI Emerging Market Asia Index, Latin America is represented by MSCI Emerging Market Latin America Index, Europe is represented by MSCI Emerging Market Europe Index, Arabian Markets are represented by MSCI Arabian Markets Index, Africa is represented by MSCI Frontier Markets Africa Index. Indexes are unmanaged, and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges.

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LOW CORRELATIONS OF EMERGING MARKETS BONDS VS GLOBAL BONDSEM Bond Correlation to Select Global Bond Markets (USD)8

As of 31 March 2019

10 YEAR

Global Government Bond 0.54

Global Bond 0.69

US Bond 0.30

EMERGING MARKETS HAVE TRANSFORMED OVER THE YEARS

WHY INVEST IN THE EMERGING MARKETS?

EMERGING MARKETS EQUITY OUTPERFORMS ASIA & GLOBAL EQUITIESIndexed to 100, Total Return, USD9

31 December 1987–31 March 2019

0

500

1,000

1,500

2,000

2,500

3,000

1987 1994 2000 2006 2012 2019

Mexican peso crisis 1995 Oil price

collapse 2015

European debt crisis 2009

Global financial crisis 2008

Asian financial crisis and the ensuing crisis in Russia & Latin America

MSCI EM MSCI AC Asia ex JP MSCI World Index

For illustrative and discussion purposes only. Past performance is not an indicator nor a guarantee of future performance.

6. Source: Bank of America Merrill Lynch, data as of 31 March 2019.7. Source: MSCI, FactSet as of 31 March 2019.8. 1 = Perfect Positive Correlation; 0 = No Correlation; -1 = Perfect Negative Correlation. Source: Morningstar Direct as of 31 March 2019. Emerging Markets Bond as represented by JP Morgan Emerging Markets Global Bond Index; Global Government Bond as represented by JP Morgan GBI Global; Global Bond as represented by Bloomberg Barclays Global Aggregate Index; US Bonds as represented by Bloomberg Barclays US Aggregate Bond. Correlations are calculated against JPM GBI-EM Global Composite TR USD using weekly data.9. Source: FactSet. Emerging Markets are represented by MSCI Emerging Markets Index–Total Return; Emerging Asia ex Japan is represented by MSCI AC Asia ex Japan Index–Total Return; Developed Markets are represented by MSCI World Index–Total Return. Indexes are unmanaged and one cannot invest directly in an index. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed or produced by MSCI.

• Fundamentals have improved in the emerging markets as reflected in the improvements of their sovereign credit rating over the last 17 years.

• Emerging markets have transformed from commodity-driven economies a few decades ago into high technology, consumption-driven sectors.

• Global emerging markets bond offers lower correlation to global and US bonds. This provides diversification in an investor’s portfolio and helps to manage risks within.

• Global emerging markets equity clearly outperformed Asian and global equities. It also complements an Asian equity portfolio as it covers broader geographical spectrum from Latin America, Eastern Europe, Middle East to Africa, which each has its domestic economic drivers. The question is, how does investor in Asia effectively tap into this opportunity where there are risks and volatility embedded within?

EMERGING MARKETS SOVEREIGN RATING IMPROVEMENTS6

AVERAGE CREDIT RATING FROM

BB- in 2002

�BBB- in 2019

EMERGING MARKETS IS NO LONGER A COMMODITY PLAYMSCI Emerging Markets Sector Evolution7

10 years ended 31 March 2019

26.9% 2019

23.8% 2009

19.8% 2019

10.3% 2009

15.5% 2019

29.3% 2009

IT / COMMUNICATION SERVICES26.9% 2019

23.8% 2009

19.8% 2019

10.3% 2009

15.5% 2019

29.3% 2009

CONSUMER

26.9% 2019

23.8% 2009

19.8% 2019

10.3% 2009

15.5% 2019

29.3% 2009

ENERGY & MATERIALS

For illustrative and discussion purposes only.

© 2019 Franklin Templeton Investments. All rights reserved. EM IAS APAC FL 03/19

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