“Emerging Economies: Now and Next” Tan Teng Boo

“Emerging Economies: Now and Next”
By
Tan Teng Boo
Capital Dynamics (Australia) Limited
ACN 53 129 846 260
AFSL 326283
Advisers Big Day Out
Investment Manager Roadshow
www.capitaldynamics.com.au
1 Emerging Economies:
Now and Next
Why Emerging Economies
Matter to the World Economy
2 Emerging economies have been driving global GDP growth 7 Spread of GDP growth between Emerging and Advanced Economies 6 5 percentage points (Positive numb er indicates outperformance) 4 3 2 1 0 ­1 ­2 ­3 1960 ­ 2010 ­4 60 65 70 75 80 85 Source : data.worldbank.org
3 90 95 00 05 10 6,500 Energy Consumption (mln tonnes oil equivalent) 6,000 5,500 5,000 OECD 4,500 4,000 3,500 Non­OECD 3,000 2,500 1980 ­ 2008 2,000 1980 1985 1990 1995 Source: BP Statistical Review of World Energy June 2009
4 2000 2005 The i Capital Long Boom A unique and original view of the global economic transformation and the impact of this unprecedented secular change
5 How can the i Capital Long Boom benefit me? Ø Identify investing opportunities/risks; Ø Adopt the right business and management strategies in a volatile but booming environment.
6 What is a long boom ? a. 1789 – 1815 : The Industrial/French Revolution (26 years) Began in 1789 amidst the Industrial Revolution that was brought to a halt by the Post­Napoleonic Wars Recession. b. 1848 – 1872 : The Great Railway Era (25 years) Ended in 1872, when European and US financial companies started to go bust, partly due to the outstanding loans that financed many railroad lines and to the failure of banks.
7 c. 1897 – 1921 : The Emergence of Great Inventions (24 years) The inventions of car, telephone and electricity enabled the most expansive boom the world had ever seen. d. 1948 – 1973 : Post­ War Boom ( 26 years) Resulting from the aftermath of the World War II, the Marshall Plan. Birth of global institutions like IMF, World Bank, GATT, United Nations. e. 1994 – 2020 – The Internet Age ( 27 years) Built on new technologies in communications and in globalisation,delivering unprecedented wealth.
8 The i Capital Long Boom
Capital Long Boom Global History – A Unique Snapshot Greek, Egyptian civilizations, etc – not sustained. Chinese, Indian civilizations – sustained but could not reinvent until now. Rise of Western Europe. Role of Industrial Revolution and Colonialism. The Industrial Revolution benefited only a small group of people. Rest of the World was left behind. Now, the Rest of the World, is catching up. The i Capital Long Boom is uniquely defined by the huge number of people that it benefits. This will make the unfolding opportunities unbelievably wide in scope and variety. 9 Key Drivers of the i Capital Long Boom The Catalyst 1. China : Once­in­a­Millennium The 2 Enablers 1. Computer/Internet Revolution 2. Globalisation The Magnifier 1. Benefiting India & Rest of the World
10 The Catalyst 1.China : Once­in­a­1000 years
11 China’s Past – A Snapshot The different Ages of China ­ from Xia Dynasty to Now
Xia to Zhou Qin to early Ming Late Ming to early Qing Mid Qing to 1949 Age of Dynasties Age of Unity and Prosperity Age of Complacency Age of Decline and Humiliation, Age of Turbulence Age of Transition Republican Era 1949 to 1978 1978 to now China Unified Modern China 12 China’s Past China was the world’s largest economy from 14 th century to late 19 t century CE 1 1000 1500 1600 1700 1820 1870 1913 1950 1973 2001 Country India India China China India China China USA USA USA USA Share in World Economy 32.9% 28.9% 24.9% 29.0% 24.4% 32.9% 17.1% 18.9% 27.3% 22.1% 21.4%
13 Reforms The Reform Era (1978) To reverse the declining trend of its economy, China, under the leadership of Deng Xiaoping, launched its reform programmes in 1978. When the initial reform measures proved tremendously successful, other reform programmes were introduced. Endless pragmatic reforms over the past thirty odd years were far­reaching both in terms of breadth and depth. As a result, China’s economy was turned upside down and transformed from a pariah state to the world’s top investment destination and economic powerhouse.
14 Reforms Reform efforts continue after the death of Deng Xiaoping. Major events after 1997 include: Ø WTO membership in Dec 2001 Ø Float the Renminbi exchange rate on 21 Jul, 2005 Ø 11 Five­year Programme – no longer micro planning Ø Switch from investment and export­led growth to consumption­led growth
15 Reforms Results of reforms have been very impressive Ø Strong and sustained economic growth Ø Massive reduction in poverty Ø A major trading nation Ø A top destination for FDI Ø Accelerated modernisation of China in key areas like economy, science and technology, education, defence.
16 16 14 China's Real GDP Growth % 1978 ­ 2010 12 10 8 6 4 2 0 1978 1983 1988 1993 1998 Source : www.stats.gov.cn
17 2003 2008 5000 US$ China's GDP Pe r Capita 4500 4000 3500 3000 2500 2000 1980 to 2010 1500 1000 500 0 1980 1985 1990 1995 Source : www.imf.org
18 2000 2005 2010 Why has economic growth since 1978 been strong and sustained ? Chou En­lai – Four Modernisations in 1975. i. Agriculture; iii. Manufacturing industry; and ii. Science and technology; iv. Defence. Summary ­ factors of success : [1]. Decentralisation, [2]. Market forces, [3]. Ownership reform and privatisation, [4]. Thought liberalisation, [5]. Internationalisation/opening up, [6]. Pragmatism of Communist Party leadership, [7]. Humiliated pride – powerful motivation, [8]. Intelligent experimenting, [9]. Willing to learn from Rest of the World, [10]. Very hungry and very eager to learn; [11]. Not blaming others for being smart but blaming oneself for being stupid.
19 China’s Prospects a. Will China sustain her strong growth? Repeating the same factors of success b. Implications of sustained strong growth ­ Extrapolate economic growth to understand implications. ­ Size of China’s economy and population. ­ Impact : military, economic, political, social and cultural.
20 80,000 70,000 2006 US$ bln Projected GDP of the US and China Projected GDP 60,000 50,000 40,000 30,000 US 20,000 China 10,000 0 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 Source : Goldman Sachs
21 90,000 80,000 2006 US$ Projected GDP per capita 70,000 60,000 US 50,000 40,000 China 30,000 20,000 10,000 0 36526 40179 43831 47484 Source : Goldman Sachs
22 51136 54789 25 Barrels Oil Consumption Per Capita, 2009 20 15 10 5 0 Japan US China Source : BP Statistical Review of World Energy 2010, www.imf.org
23 300 Population of Motor Vehicles in 2008 mln 8.3 vehicles/10 people 250 200 150 100 50 0.3 vehicles/10 people 0 China US Source : China Statistical Yearbook 2009, World Bank
24 The 2 Enablers 1. Internet/IT Revolution
25 What is the Internet? A global network of networks allowing computers and devices to directly and efficiently communicate and share services throughout the world.
26 What is impact of the IT/Internet revolution? •Metcalf Law. •If you have the only fax machine in the world it is worth nothing. •But for every other fax installed in the world, your fax machine increases in value. •In fact, the more faxes in the world, the more valuable everybody's fax becomes.
27 What is impact of the IT/Internet revolution? Open­ended Possibilities Computers – artificial intelligence. For the first time in human history, IT and Internet allow an interaction of natural intelligence with artificial intelligence on a global scale – this is what makes its impact so dynamic, so powerful and so open­ended.
28 What is impact of the IT/Internet revolution? Internet/IT Revolution exposed huge number of people to the outside world à speeds up and magnifies globalization process.
29 What is impact of the IT/Internet revolution? Knowledge Most important factor of production. The Internet/IT Revolution is commoditising knowledge.
30 What is impact of the IT/Internet revolution? Another dimension The IT/Internet revolution – adds another dimension – the virtual dimension ­ without cannabalising the physical dimension. You can experience a hotel room but that is not a substitute for the real experience. Virtual reality is not real reality. But the combination of the virtual and the physical dimension unleashes massive potential for world economy.
31 The 2 Enablers 2. GLOBALISATION
32 History of Globalisation 2 waves of globalisation • 1 st wave: 1820 – 1914 • 2 nd wave: 1960s – Present • Similarities & differences • How the 1 st wave of globalisation ended & why the present wave is likely to continue
33 Evolution of Intellectual Thought • Adam Smith (1771) Wealth of Nations – Free trade maximises wealth since it allowed more efficient division of labour – “If foreign trade can supply us with a commodity cheaper than we ourselves can make it, better buy it off them with some part of the produce of our own industry” • David Ricardo, James Mill (early 19 th century) – Further development of comparative costs
34 Contracting Spiral of World Trade: Total imports (in mlns of US Dollars) of 75 countries between Jan 1929 – Mar 1933 Source : The World in Depression, 1929­1939, Charles P. Kindlebe
35 nd 2 Wave: 1947 ­ Present • Restoration of the world trade system • 1947: GATT formed • Cold War – Trade was to draw 3rd world nations into the capitalist camp, or prevent them from tilting towards communism • US economic dominance • US tariff concessions granted to US’ trading partners • Trade liberalisation in Europe – Formation of the Common Market and the European Coal and Steel Community
36 GATT 1947 • What? – An agreement signed by 23 countries containing tariff concessions & a set of rules to prevent concessions from being frustrated by restrictive trade measures • Why? – Economic motivation: “Beggar thy neighbour” policies were viewed as a significant factor exacerbating the Great Depression. – Political motivation: Prevent 3 rd world countries from tilting towards communism
37 6 Average Annual per Capita GDP Growth Rates % 5 Globalisers Non­Globalisers 4 3 2 1 0 1960s 1970s 1980s 1990s Globalisers: Countries that undertook liberalisation efforts such as trade liberalisation, financial liberalisation & improving market access to foreign investors Source: Globalization, Inequality & Poverty since 1980
38 Our “Globalisation” Ø Massive global economic reforms in late 1970s and 1980s Ø Opening up of China in late 1970s Ø President Reagan and Margaret Thatcher reformed the economies – more market­oriented, reduced trade barriers, privatised state­run enterprises and let private sector take the lead. Ø Fall of Berlin Wall on 9 Nov 1989 released part of the world that was governed by the Soviet Empire to integrate with the rest of the world Ø Free market capitalism finds its way to most parts of the world – Asia, the Middle East, Africa and Latin America. Together with technological innovations in communications and transportation à the world is tightly linked through expanded trade and capital flows. Ø Increases the interactions between domestic and international contexts à economics, politics, cultures, almost anything one can think of Ø Countries rely heavily on technological transfer, human and capital flows, trade, etc – making the world economy more interconnected. Ø This is what we call “globalisation”.
39 The IT/Internet revolution and transformation of China’s economy mean that the current wave of globalisation would have a different impact than the past globalisation
40 The Magnifier 1. Benefiting India + Rest of the World
41 Thomas Friedman (2005), The World Is Flat Girls, when I was growing up, my parents used to say to me, “Tom, finish your dinner – people in China and India are starving? My advice to you is: Girls, finish your homework – people in China and India are starving for your jobs.” Now, the world economy has changed. Now, people in China and India are creating jobs for you.
42 2400 US$ GDP Per Capita 2000 China 1600 1200 India 800 400 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 Source : www.imf.org
43 50000 US$ bln
40000 30000 20000 GDP Projections China India US Japan 10000 0 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 44 12 10 % India Annual Real GDP Growth 8 6 4 2 0 ­2 ­4 1951 ­ 2009 ­6 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 Source: www.rbi.org.in
45 2 1.5 India Current Account Balance (% of GDP)
1 0.5 0 ­0.5 ­1 ­1.5 ­2 1980 ­ 2009 ­2.5 ­3 Source: www.imf.org
46 Economic Reforms in India
• In response to a fiscal and balance of payments crisis in 1991, India launched a program of economic reforms. Systematic shift to a more open economy with greater reliance upon market forces, a larger role for the private sector including foreign investment, and a restructuring of the role of government. • The need for policy shift had become evident much earlier, as many countries in East Asia, especially China, achieved high growth and poverty reduction through policies which emphasised greater export orientation and encouragement of the private sector. 47 • India’s reforms were preceded by a serious financial crisis: ­ In 1990­91, gross fiscal deficit of the government (center and states) reached 10% of GDP. ­ Annual rate of inflation peaked at nearly 17% in August 1991. ­ An unprecedented balance of payments crisis emerged in early 1991: For the first time in modern history, India was faced with the prospect of defaulting on external commitments as her foreign currency reserves had fallen to only US$1 billion by mid­1991.
48 5. A Summary Impact of the i Capital Long Boom
Capital Long Boom 49 Secular, Volatile Global Boom Volatile GDP, Volatile Pricing Environment
50 The Industrial Revolution – broad technology progress but geographically narrow, small segment of world population benefitted. The i Capital Long Boom – Capital Long Boom benefits a very massive number of people globally. No colonialism. Volatility is a key feature.
51 Agriculture à manufacturing à Services à Creative/leisure/lifestyle industries. The world economy sees countries undergoing all these 4 stages of economic development. Unprecedented.
52 “Old” factors of production – land, labour, capital, entrepreneurship. Knowledge – now most important factor of production. The IT/Internet Revolution is commoditising knowledge – the i Capital Long Boom producing new competitors fast and all over the globe.
53 Transformation of China – every economy benefits. China now and India eventually à positive impact on developed and developing countries simultaneously. Developed and Developing economies : major consumers à benefit from deflation for manufactured products. Commodity/agriculture sectors à benefit from rising commodity prices.
54 Source : www.stats.gov.cn
55 China + IT/Internet revolution + Globalization + ROW à Volatile Pricing, Secular Boom. Major impact on monetary policy and stock market valuation.
56 CAPITAL DYNAMICS WHO WE ARE
57 Capital Dynamics’ Milestones 1987 Stock Market Crash
Early 1988 Tan Teng Boo set up Capital Dynamics Sdn Bhd, Malaysia’s 1st independent investment adviser. ­ i Capital and 本投 ® flagship publications. ­ In business for over 22 years. 58 Capital Dynamics’ Milestones 1997 Great Asian Crisis
Mid­1997 In May 1997, Capital Dynamics Asset Management obtained Fund Manager’s license. ­ focuses on Malaysian equities 59 Capital Dynamics’ Milestones Dotcom Crash
23 July 2002 In the depths of the Dotcom crash, www.icapital.biz was launched. Flagship investment website. 60 Capital Dynamics’ Milestones 19 October 2005 icapital.biz Berhad, Malaysia’s only listed closed­end fund and managed by Capital Dynamics Asset Management, was listed on Bursa Malaysia.
61 Capital Dynamics’ Milestones February 2006 Capital Dynamics’ first global office was set up in Singapore
62 Capital Dynamics’ Milestones Financial Times July 2007 19 Jul 2007
The i Capital Global Fund, an open­end global equity fund, was launched. 63 Capital Dynamics’ Milestones Financial Times 15 Sep 2008 Financial Times 11 Oct 2008 December 2008 In the depths of the 2008 US­led financial crisis, Capital Dynamics Australia Limited (AFSL326283) obtained Australian Financial Services Licence and became the 1 st Asian­owned fund manager to have one.
64 Capital Dynamics Capital Dynamics (Australia) Ltd (AFSL
326283)
•Set up in 2008.
•A Sydney­based global fund manager.
•Licensed by the Australian Securities
and Investments Commission.
www.capitaldynamics.com.au
Capital Dynamics Asset Management
Sdn Bhd (389773­H)
•Set up in 1997.
•A KL­based fund manager.
•Licensed by the Securities Commission.
www.cdam.biz
Capital Dynamics (S) Pte Ltd (200601146G)
• Founded in 2006.
•A Singapore­based
global fund manager.
•Operates under the purview of
the Monetary Authority of Singapore.
www.capitaldynamics.com.sg
Capital Dynamics Sdn Bhd (171744­U)
•Founded in 1988.
•A KL­based investment adviser.
•Licensed by the Securities Commission.
www.icapital.biz
Capital Dynamics Asset Management (HK) Pte Ltd
•set up in 2010.
65 Capital Dynamics Australia ABN 53 129 846 260 AN ASIAN FIRST Provide retail investors with proven investment success of Capital Dynamics. Philosophy based on the 3 “i”s ­ Independence, Intelligence and Integrity. Capital Dynamics, Australia offers 2 levels of funds management service: [1]. The i Capital International Value Fund (ARSN 134 578 180) [2]. Individually Managed Accounts
66 i Capital International Value Fund üOpen­end global equity fund for retail investors. üLong­term capital appreciation. üBased on “Intelligently Eclectic” value investing style. üLow risk, high return is the aim. üInitial minimum investment = AUD20,000. üAdditional minimum investment = AUD2,000. üInvests in 42 stock markets. The fund is priced in AUD. üDoes not invest in derivatives, sell short or borrow. üDistributed directly to retail investors.
67 i Capital International Value Fund
ü Investors buy & sell based on NAV. No bid­offer spread. ü Investors do not pay commissions, entry or exit fees. ü Retail and wholesale investors pay same fee. ü No daily or weekly pricing, only monthly unit price. ü First­year lock­in, Quarterly redemption, 2 months notice. ü Management fee = 1.5375% p.a. ü Performance fee = 20.5% if 2 conditions met [1]. 6% net annual return [2]. 6% net compound return since inception 68 Individually Managed Accounts Discretionary funds management service for wholesale investors. Objective: Long­term capital appreciation Investment philosophy: Value investing
69 Why Capital Dynamics Australia Part [A]. Total Commitment v The 3 “i”s vOwner­operated
70 Why Capital Dynamics Australia
Our i Capital Branding Our approach to investing is mirrored in our corporate philosophy known as the 3 “i”s 71 Why Capital Dynamics Australia
independence It is not linked with any financial institutions, banks, stock broking companies, political or government organisations, preventing any possible conflicts of interest from arising. Capital Dynamics Australia is owner­operated. 72 Why Capital Dynamics Australia
intelligence We do not act on rumours, hearsay, etc but only on an intimate knowledge of investments, based on intelligent and objective analysis. We conduct our own research and analysis, based on primary sources. No secondary research. 73 Why Capital Dynamics Australia
integrity Our success is undeniably tied with our clients’ success. While it sounds abstract, we believe that integrity will in the long run show in the investment returns our clients receive. 74 Why Capital Dynamics Australia Part [B]. Our “2 Secrets”
75 Why Capital Dynamics Australia [Secret 1]. Sound and Rational Investment Framework The lack of a sound, rational framework is one of the most important reasons why most fund managers performed poorly for their clients. Our sound investing framework is built after years of experience and research.
76 [Secret 2]. Experienced Leadership Tan Teng Boo, aged 57, a highly experienced fund manager, supported by a growing team. Teng Boo has grown the AUM substantially with little advertising. Capital Dynamics has attracted local and foreign investors who have benefited from his 39 years experience. Successfully steered the group to become one of the region’s leading fund managers whose funds have consistently outperformed the benchmark indices by a wide margin. A "fanatic's" interest has enabled him to be very familiar with the different methods of investment analysis and approaches ­ understanding their strength and weaknesses and suitability of each to different investment objectives and circumstances. He has the truly unique ability to blend his investing skills with his business experiences. He obtained an honours degree in Economics from Sussex University in 1977.
77 … continued
As Warren Buffett said, “It’s been awfully good to have a foot in both camps”. Tan Teng Boo is widely recognised as one of the most consistent and experienced Investment managers. He is the founder and managing director of Capital Dynamics (A) Ltd, Capital Dynamics (S) Pte Ltd, Capital Dynamics Sdn Bhd and Capital Dynamics Asset Management Sdn Bhd. 78 Track Record [1]. Capital Dynamics (Australia) Ltd i Capital International Value Fund 12% 10% Figure 1: Annualised Performance of ICIVF (Jul 2009 to Jan 2011) ICIVF MSCI W MSCI A 9.37% 8% 6% 5.54% 6.15% Figure 2: Cumulative Performance of ICIVF (Jul 2009 to Jan 2011) 20% ICIVF MSCI W MSCI A 15.30% 4% 15% 2% 10% 0% 5% 0% Past performance is no guarantee of future results.
79 8.95% 9.94% Track Record [1]. Capital Dynamics (Australia) Ltd i Capital International Value Fund Past performance is no guarantee of future results.
80 Track Record [2]. Capital Dynamics (S) Pte Ltd i Capital Global Fund Figure 3: Annualised Performance of ICGF (Jul 2007 to Jan 2011) 12% ICGF 7.99% 8% MSCI W MSCI A 4% Figure 4: Cumulative Performance of ICGF (Jul 2007 to Jan 2011) 40% 0% 31.64% ICGF ­4% ­8% MSCI W MSCI A 20% ­5.99% ­5.31% 0% ­20% Past performance is no guarantee of future results.
­40% 81 ­19.82% ­17.74% Individually Managed Accounts Track Record [2]. Capital Dynamics (S) Pte Ltd Figure 5: Annual Return (Aug 2006 ­ Dec 2010) 12% 9.09% CDPL MSCI W MSCI A 8% 4% Figure 6: Cumulative Return of CDPL (Aug 2006 ­ Dec 2010) 60% 0% ­1.36% 45.88% ­0.29% CDPL MSCI W MSCI A 40% ­4% 20% 0% ­5.79% ­20% Past performance is no guarantee of future results.
82 ­1.27% Track Record [3]. Capital Dynamics Asset Management S/B icapital.biz Berhad Figure 7: Annualised Performance of icapital.biz Bhd (Oct 2005 to Jan 2011) NAV 25% 20.29% Market Price 20% 15.47% KLCI 15% 10.09% 10% 5% 0% Figure 8: Cumulative Performance of icapital.biz Bhd (Oct 2005 to Jan 2011) NAV 200% 165.66% Market Price 150% 100% 50% 0% Past performance is no guarantee of future results.
83 114.00% KLCI 66.26% [3]. Capital Dynamics Asset Management S/B Individually Managed Accounts Figure 9: Annual Return (Apr 1998 ­ Dec 2010) 25% 20.89% 20% 15% 10% Figure 10: Cumulative Return of CDAM (Apr 1998 ­ Dec 2010) 1200% 1008.5% 7.31% 5% 900% 0% CDAM KLCI 600% 300% 144.67% 0% Past performance is no guarantee of future results.
CDAM 84 KLCI 5 REASONS TO INVEST NOW with CAPITAL DYNAMICS (AUSTRALIA) LTD
1. Investors’ Interest Is No 1 Priority 2. Very Unique Fund Structure and Features 3. Sound Investing Philosophy 4. Veteran Fund Manager 5. Brilliant Track Record Trading involves risk of loss and may not be suitable for you. This presentation has been provided for general information purposes only and must not in any way be construed or relied upon as personal or financial advice. No consideration has been or will be given to the individual investment objectives, financial situation or needs of any particular person. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. Past performance is no guarantee or reliable indicator of future results. None of CDAL nor any of its related entities guarantees the performance of any of the funds or the repayment of capital or any particular rate of return or any distribution. Please ensure you obtain and read the Product Disclosure Statement prior to investing so that you are fully informed regarding the key risks and cost.
www.capitaldynamics.com.au 85