1

Four Years After the Great Recession:

The Outlook for Emerging Economies
and Equity Markets in 2013
November 2012

George R. Hoguet, CFA, FRM
CMINST-####
The information contained in this document is current as of the date presented unless otherwise noted.
This presentation is solely directed at qualified investors within the meaning of the FINMA circular 2008/8.
2
Summary
After slowing in 2012, growth in emerging markets is expected to accelerate to 5.4% in
2013, more than four times the estimate for developed markets
The outlook varies significantly by region with Asia, led by China and India, expected to
grow 6.6% and Central Europe 2%
Monetary policy in emerging markets remains accommodative and emerging markets
retain policy flexibility. However, economic activity in emerging markets is closely linked
to global trade, commodity prices, and financial conditions. A disorderly default/financial
crisis in the Eurozone will inevitably impact emerging markets.
Risks to global economic activity remain to the downside, but QE3 and OMTs have
placed a support on asset prices
At roughly 10 times 12 month earnings current emerging market valuations are not
demanding. Assuming a ten year average forward p/e of 10.7 current valuations
anticipate a further 7% in 2013 EM earnings downgrades. Flows to emerging assets of
all kinds are likely to accelerate and investors should continue to reduce the home bias.

3
Background
The emerging markets in the global economy
Transmission mechanisms of the Global Financial Crisis to emerging markets:
Trade
Commodities
Capital Flows
The policy response and its aftermath
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The BRICs in 2013
China's growth to reaccelerate from 7.5% to 8% in the face of monetary and fiscal stimulus
Major policy initiatives in China to be implemented in 20142015
ndia's growth to reaccelerate to 6.5% based on a pick up in corporate investment
Sharp acceleration in Brazil. 1.4% to 4.1% in 2013. The Central Bank has cut rates by 525
basis points since July 2011.
Russia: Mid-East tensions and secular growth in oil demand support 3.5% growth in 2013
2013 CPI forecasts: China 3.1%; India 6.9%; Russia 6.4%; Brazil 5.3%
Source: JP Morgan, Morgan Stanley, SSgA estimates
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India
6.3%
What is an Emerging Market? What an Index Provider Says it is!
Mexico
5.0%
Brazil
13.0%
South Africa
8.1%
Rest of
the World
17.6%
Taiwan
10.7%
China
17.8%
Russia
6.0%
Korea
15.5%
Larger Markets Smaller Markets
Regional Weights Benchmark Weights

Asia 59.9%
Europe 9.7%
Latin America 22.0%
Mideast/Africa 8.4%
Country Weight

Country Weight
Asia Europe
Indonesia 2.8% Czech Republic 0.3%
Malaysia 3.7 Hungary 0.3
Philippines 0.9 Poland 1.4
Thailand 2.2 Turkey 1.7
Latin America Mideast/Africa
Chile 2.0 Egypt 0.3
Colombia 1.3 Morocco 0.1
Peru 0.7
US $3.4 trillion in market capitalization
819 companies
21 countries
Roughly 13% of the MSCI All Country World Index
Source: MSCI via FactSet as of July 31, 2012. The MSCI EM Index is a trademark of MSCI Inc. Countries
and weights are as of the date indicated, are subject to change and should not be relied upon as current thereafter.
The BRICS Account for Roughly Half of the MSCI EM Index
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Source: JP Morgan, Factset, Morgan Stanley
Data as of October 12, 2012
Earnings in Emerging Markets are Expected to Grow in Double
Digits Next Year
Projected MSCI Earnings Growth Rates and Valuations 2013
Region NTM EPS FPE Yield ROE GDP
US 12.3% 12.9 2.2% 15.2% 2.1%
Europe 8.9 10.8 3.9 11.3 0.4
Japan 37.0 11.1 2.7 4.4 0.6
Emerging 17.0 10.2 2.9 13.6 5.1
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December 31, 1987
December 31, 2011
December 31, 2001
December 31, 2011
S&P 500

MSCI
World MSCI EM S&P 500

MSCI
World MSCI EM
Annualized Return 8.04 5.48 11.04 -2.82 -1.65 7.82
Annualized Standard Deviation 19.17 17.14 26.59 17.77 17.36 23.31
Beta to MSCI World 1.00 1.00 1.18 1.00 1.00 1.16
Correlation to MSCI World 0.93 1.00 0.79 0.97 1.00 0.87
Sharpe Ratio 0.28 0.16 0.32 0.06 0.12 0.50
Sortino Ratio 0.53 0.26 0.50 0.08 0.17 0.69
Source: Style Advisor (Data in Swiss Francs
Past performance is not a guarantee of future results.
Index returns are unmanaged and do not reflect the deduction of any fees or expenses.
Index returns reflect all items of income, gain and loss and the reinvestment of dividends and other income.
Mean Reversion Theory Would Suggest that the Performance
Difference Between Emerging and Developed will Narrow
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2.1%
3.6%
6.5%
10.0%
11%
13%
31%
37%
50%
0%
10%
20%
30%
40%
50%
Insurance
al l ocat i on
Pensi on fund
al l ocat i on
Current
i nst i t ut i onal
al l ocat i on
Mut ual fund
al l ocat i on
Gl obal
l i qui di t y
MSCI AC-WI
wei ght
Gl obal
market
capi t al i zat i on
Nomi nal GDP Gl obal
growt h
(2010-2020)
EM Share of World
As of end Aug 2010
Source: CEIC, ERWIN, FactSet, IMF, MSCI, GS Global ECS Research estimates.
Emerging Markets Will Continue to Attract Institutional Flows
GLSTND-0567
37%
31%
13%
49%
44%
19%
59%
55%
31%
0%
10%
20%
30%
40%
50%
60%
70%
GDP Market Cap MSCI World Wgt
EM Share of World
2010
2020E
2030E
2010 2020E 2030E
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Trying to PuII off the EIusive "Soft Landing"
China
'07 '08 '09 '10 '11
6
7
8
9
10
11
12
13
14
15
P
e
r
c
e
n
t

Source: China's National Bureau of Statistics
History as of Q2-12.
China's GDP Growth
China Real GDP, % chg y/y
China's CPI Inflation
'07 '08 '09 '10 '11 '12
-4
-2
0
2
4
6
8
10
P
e
r
c
e
n
t

Source: China's National Bureau of Statistics
History as of Aug-12.
China CPI, % chg y/y
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But there is Some Doubt About the Economy's Momentum and
PoIicymakers' ResoIve
China
'07 '08 '09 '10 '11 '12
-10
-5
0
5
10
15
20
25
30
P
e
r
c
e
n
t

Source: National Bureau of Statistics
History as of Aug-12.
China's Electricity Output
China Electricity Production, % chg y/y
'07 '08 '09 '10 '11 '12
10
12
14
16
18
20
22
24
26
28
30
32
P
e
r
c
e
n
t

Source: People's Bank of China
History as of Aug-12.
China's Money Growth
China M2 Money Supply, % chg y/y
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Global Imbalances Are Slowly Falling
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
1
9
9
2
1
9
9
3
1
9
9
4
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
2
0
1
4
%

O
F

G
D
P
Asia Ex-Japan Current Account Balance
Source: Morgan Stanley
As of September 2012
13
Source: Euromonitor, Morgan Stanley
As of December 2010
0
30
60
90
120
150
180
210
240
270
1
9
9
1

1
9
9
2

1
9
9
3

1
9
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4

1
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2
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2
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China India Russia Brazil Japan US
N
o
.

o
f

H
o
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s
e
h
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i
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M
i
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s

And Domestic Demand is Growing Rapidly in the BRICS
Number of Households with Disposable Income Over $10,000
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Conclusion
The global recovery remains substandard and several risks remain: Europe, US fiscal
cliff, China policy mistake and Iran
Emerging economies remain closely linked to the global economy, but are increasingly
resilient. They are expected to grow 5.4% in 2013, but risks are to the downside.
The Great Recession has enhanced the secular case for investing in emerging markets
Valuations in emerging markets are not demanding by historic norms, but earnings
estimates are being revised downwards