Investment in Emerging Equities Is there still more to go?

Michael Tjoajadi

For Professional Investors only.

Forecast GDP growth a two speed recovery

Emerging countries account for two thirds of global growth

y/y%

5 4 3 2 1 0 -1 -2 -3 96 97

Asia crisis

Baseline forecasts Last US recession

98

99

00

01

02

03

04

05

06

07

08

09

10

11

12

Growth contribution from the OECD countries Global growth

Growth contribution from emerging markets

Source: IMF, Consensus Economics, Schroders, August 2011 Please refer to the forecast risk warning in the important information

Trend GDP growth estimates for world economy by region

8% 7% 6% 5% 4% 3% 2% 1% 0%
W or ld US Am er ica an om ie m ie As ia Eu ro p Ea st on no ro z Ja p Af ri ca e e s s

GDP Growth 2010 2020 (f) pa Developed Emerging 1.3% 5.0%

on

dle

ec o

ste

M id

ec

tin

va nc ed

lo

10 year historic trend, 1998 - 2008

De ve

Ad

Model-generated trend, 2010-2020

Emerging economies expected to continue to grow much faster than developed economies
Source: UBS estimates, September 2010 Regions are mentioned for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The data includes some forecasted views. We believe that we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. There is no guarantee that any forecasts or opinions will be 2 realized. Opinions obtained from third parties have been obtained from sources we consider to be reliable.

Su

bSa h

La

pin

Ea

ar an

Eu

rn

EM & US consumption as a % of global consumption

%

40 36 32 28 24 20 16 1990 1992 1993 1994 1995 1996 1997 1999 2000 2001 2002 2003 2004 2006 2007 2008 2009 2010 2011 US Emerging Markets

EM consumption overtook US consumption in 2008

3
Source: JPMorgan, Data as at June 2011. Historical trends are not necessarily indicative of future trends.

Emergence of BRICs middle class

Household Disposable Income over US$10,000
No. of Households in Millions

500 450 400 350 300 250 200 150 100 50 0

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e

BRICs

Euro Area*

US

BRICs consumer has become a driving force in the global economy

Source: Euromonitor, Morgan Stanley Research. As at June 2011. * Includes Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Netherlands, Portugal and Spain, Slovakia and Slovenia. The data includes some forecasted views. We believe that we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. There is no guarantee that any forecasts or 4opinions will be realized. for illustrative purposes only and should not be viewed as a recommendation to buy/sell. Countries are mentioned

Investment spending trends

Investment spending as percentage of global GDP, 1980-2016F
%

20 18 16 14 12 10 8 6 4 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016
Forecast

Developed Markets

Emerging Markets (Incl Asian NICs)

Investment spending is higher in the emerging than the developed world and is set to continue growing

Sources: IMF Forecast and Citi Investment Research and Analysis. Data as at April 2011

Emerging economies trade trends

Share of emerging markets* exports
%

24 22 20 18 16 14 12 10 8 6 4 2 0 1992 1994 1996 U.S. 1998 2000 2002 2004 2006 2008 China 2010 2012

Declining importance of the US to global growth

Source: BCA Research as at June 2011 *Includes Brazil, Chile, Turkey, Taiwan, Korea, Thailand, Singapore, Malaysia, Indonesia, Philippines and India Countries are mentioned for illustrative purposes and should not be viewed as a recommendation to buy/sell.

Chinese exports
As a % of total Chinese exports
%

54 52 50 48 46 44 42 40 38 36 2000 2002 2004 2006 2008 2010 Exports to G7 2012

Exports to Emerging Markets*

China exports more to GEMs than G7

Source: BCA Research as at June 2011 *Includes non-Japan Asia, Africa, Latin America and Russia Export percentages are mentioned for illustrative purposes.

Government debt
G-20 vs. Emerging countries: General government debt ratios
%

120 100 80 60 40 20 0 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 Advanced G-20 economies Emerging G-20 economies

Who is more likely to default?

Source: World Economic Outlook (WEO), September 22, 2009, The state of public finances cross-country fiscal monitor, IMF, November 3, 2009 and UBS, Haver, as at June 2011 The data includes some forecasted views. We believe that we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. There is no guarantee that any forecasts or opinions will be realized. 8 Historical trends are not necessarily indicative of future trends.

Structural (and unsustainable?)

Current account balances indicate appreciation of Emerging currencies
USD, billions

400 300 200 100 0 -100 -200 -300 -400 -500 US Euro area Newly industrialised Asian economies Japan Emerging markets

Source: World Economic Outlook Database (April 2011), IMF Newly industrialized Asian economies are composed of 4 countries: Hong Kong SAR, Korea, Singapore, and Taiwan Province of China

Cyclical Peak

Euro Crisis

Developed economies GDP Growth Emerging China hard Markets landing? overheating? Global Liquidity +US$

Climbing a mountain of worries

Source: Schroders.

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Weak real income plus de-leveraging equals soft consumer

US net worth and savings
% Ratio

12 11 10 9 8 7 6 5 4 3 2 1 0 60 65 70 75 80 85 90 95 00 05 10 US savings as % of disposable income Ratio: Net worth of US households/ disposable income (inverted), rhs

4.0 4.5 5.0 5.5 6.0 6.5

11

11

Source: Thomson Datastream, 20 September 2011.

The great hope - corporate spending

Cash flow surges capex accelerates
Corporate cash flow
%

Business capex orders

y/y%, smoothed (3-month moving average)

3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 -2.5 -3.0 51 56 61 66 71 76 81 86 91 96 01 06 11
US total internal funds minus fixed investment as a % of GDP
Source: Schroders, Thomson Datastream, 6 September 2011 12

40 30 20 10 0 -10 -20 -30 -40 96 98 00 02 04 06 08 10 Japan machinery orders ex volatile orders Germany capital goods US durable good orders ex defence capital goods

12

Still waiting for a recovery in jobs

US GDP and jobs

Index (Base 100 = 15/02/2008)

102 101 100 99 98 97 96 95 94 08 09 US total civilian employment 10 11 US real GDP level

13

13

Source: Thomson Datastream, 6 September 2011.

Liquidity
All Dedicated EM Equity Flows1
US$ Billions

Foreign share of local market cap (selected countries)2

34%
96 83

120 100 80 60 40 20 0 0 -20 -40 -60

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

32% 30% 28% 26% 24%

-27
June 30, 2011 GEMs MSCI Weight3 MSCI AC World 13.6%

54 33 11 0 -3 6 -4 -4 16 0 8 34

22% 20%

MSCI AC World ex-US

23.7%

-49
2008 2009 2010 2011

Jan-06

Aug-01

Record inflows in 2010 but still underowned*

Morgan Stanley Research, Emerging Portfolio Fund Research. Data to 31 st August 2011. Both US and nonUS domiciled funds. All dedicated EM: GEM, Asia ex Japan, LatAm, EMEA 2Source: CEIC, UBS estimates. Selected countries: Malaysia, Indonesia, Korea, Mexico, Poland and Turkey. 3Source: Factset, MSCI. *Goldman Sachs estimates that developed markets institutional asset managers hold 6% in EM equities within their total equity portfolios. (Global Economics Paper No:204 as at Sep 2010) Historical trends are not necessarily indicative of future trends. There is no guarantee that any forecasts will be 14 realized, and opinions may change.
1Source:

Aug-04

Mar-00

Feb-03

Jan-09

Jun-10

Jul-07

What could undermine the GEMS story?

Short/Medium term: Eurocrisis Economic Growth Developed Emerging Liquidity/$ China hard landing Longer term: Social unrest caused by lack of trickle down Commodity supply inhibiting growth potential

Lots to worry about

We believe that we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know.

15

PIGIS* cant fly

16

Source: Schroders. *Portugal, Ireland, Greece, Italy and Spain

Selective reporting banks exposure to Greece, Ireland, Portugal, Italy (end 2010, $mn)
France
Total Exposure/Foreign Claims

Germany

UK
3,866,503

US
3,154,137

Chile
3,433

India
44,561

Turkey
23,605

World Total 25,153,260

3,074,681 2,940,334

Exposure to Greece, Ireland, Portugal, Italy Greece/Ireland/Portugal/Italy Exposure (% total)

505,863 16.5%

350,834 11.9%

240,032 6.2%

100,283 3.2%

24 0.70%

759 1.70%

608 2.58%

1,677,768 6.67%

Exposure to Greece Greece Exposure (% total)

56,740 1.8%

33,974 1.2%

14,060 0.4%

7,318 0.2%

0 0.00%

22 0.05%

107 0.45%

145,783 0.58%

Exposure to Italy Italy Exposure (% total)

392,577 12.8%

162,285 5.5%

66,387 1.7%

36,749 1.2%

24 0.70%

370 0.83%

439 1.86%

867,283 3.45%

Emerging banks are not significantly exposed to Greecex

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Source: Citi Investment Research and Analysis, BIS, as at July 14, 2011

Europe: Growth divergence

Two speed economy
Y/Y GDP growth 8% 6% 4% 2% 0% -2% -4% -6% -8% Y/Y GDP growth 8% 6% 4% 2% 0% -2% -4% -6% -8%

-10%
-12% 2007 2008 Germany 2009 Austria 2010 2011 Finland

-10%
-12% 2007 Greece 2008 Spain 2009 Ireland 2010 Italy 2011 Portugal

Source: Eurostat, Datastream. Data up to June 2011. Updated: 20/07/2011 18

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The Euro crisis

Can you deflate your way out of a debt crisis?
%

17 16 15 14 13 12 11 10 9 8 7 98 00 02 04 06 08 10

Greece unemployment rate (% of labour force)

19

19

Source: Thomson Datastream, 9 September, picture from BBC

The Euro crisis

Buddy can you spare 100 billion?

20

20

Source: Financial Times, Getty pictures

GEMS exports to PIGIS* (% of total exports) by region

25%

EMEA Average 11.2%

20%

LATAM Avg 4.6%

Asia Avg 2.3%

15%

10%

5%

South Africa

Indonesia

Czech Repub

Russia Fed

Colombia

Thailand

Turkey

India

0%
Morocco Egypt

PIGIS are not important for emerging economies

21
Source: Citi Investment Research and Analysis, Haver, IMF as at July 2011. Taiwan exports to Greece N/A. *Portugal, Ireland, Greece, Italy and Spain

Philippines

Malaysia

Poland

Chile

Mexico

Hungary

Korea

China

Peru

Brazil

Public debt and fiscal balance as a percentage of GDP for EM and DM in 2010
Fiscal Balance (%GDP)

2 0 -2 -4 -6 -8 -10 -12 -14 0 50 100 150 200 250

Public Debt (%GDP)
Ireland Korea Indonesia Peru China Australia Russia Mexico EM Thai

Turkey Brazil Phil Malaysia

Germany Hungary

Portugal

Czech S Africa India

Poland UK Spain

Euro area DM US France

Italy

Greece Japan

Fiscal position and level of government debt much better in Emerging Markets
Source: JP Morgan, Economics Team estimates, as at June 2011 Countries are mentioned for illustrative purposes and should not be viewed as a recommendation to buy/sell. We believe that we are basing our expectations and beliefs on reasonable assumptions within the bounds of what 22 currently know. we

Emerging currency valuations

60% 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% -50%
Hungary Philippines Thailand
Overvalued

-60%

Undervalued

Indonesia

Malaysia

Colombia

UBS PPP estimates

Big Mac Index (Economist)

EM currencies still cheap

Source: UBS, Bloomberg, June 2011 Countries are mentioned for illustrative purposes only and should not be viewed as a recommendation to buy/sell. There is no guarantee that any forecasts will be realized, and opinions may change. 23

S.Africa

Taiwan

Mexico

Poland

Russia

Turkey

Czech

China

Chile

Brazil

Egypt

Israel

Korea

Peru

China hard landing?

Economy slowing from peak levels, but still strong

Credit growth slowing to around trend growth

Food inflation peaking, but core inflation rising

Property price increases slowing, but still positive and affordability in line with trend
Fiscal situation good leaving room for further stimulus if necessary Conclusion China slowing but hard landing very unlikely

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Global Equities Outlook: The great rebalancing Soft patch or double dip?
The Positives Reversal of the impact of Japan on global supply chain Global liquidity / Postponement of normalization of monetary policies in DM given soft patch/ Coordinated effort EM growth still strong Companies are in good shape (strong cash flow)

Survival of the fittest

Softer global growth should provide relief to EM fiscal policies (and inflation) Valuations are attractive Equities under owned

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Global Equities Outlook: The great rebalancing Soft patch or double dip?
Challenges: Will the Confidence crisis turn into a new economic crisis? Short time for action.

The short and the medium term dilemmas: deleveraging in a low growth environment. Fiscal discipline, credibility and growth
Lack of leadership / election cycles and diverging interests (US and Europe)

Adapting to the new normal in a bipolar world: picking the next winners in a low DM growth / thirsty EM world
Altering global competitiveness (US vs Europe, EM vs DM): Healing in an environment of deleveraging, low growth and currency volatility Europe: Peripheral Europe and banking system Nationalism and fiscal integration
Source: Schroders The opinions stated in this presentation include some forecasted views. We believe that we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee that any forecasts or opinions will be realized.

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Dj vu? One year onincreasing fears of double dip

Oil shock and Japanese earthquake hit growth
Manufacturing Purchasing Managers Index
Index

70 65 60 55 50 45 40 35 30 25 07 US 08 UK 09 EZ 10 Japan 11 BRICs
Output contracting Output expanding

27

27

Source: Schroders, Markit PMI, NBER (National Bureau of Economic Research), September 2011. BRICs: Brazil, China, India & Russia. GDP weights based on nominal GDP in USD from IMF.

Governments have cushioned the private sector

Increase in private saving offset by rise in public borrowing
US savings by sector
% of GDP

10

1 0.9

0.8 0.7 0.6

0.5 0.4

-5

0.3 0.2 0.1

-10 75 77 79 81 83 85 87 89 91 93 NBER recession phase Non-financial companies 95 97 99 01 Households Government 03 05 07 09 11

Source: Thomson Datastream, Schroders, 6 September 2011. Savings are shown net as the difference between savings and investment 28

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Macro outlook - summary

Recession risks remain, but we continue to expect a better H2 for global growth as impact of Japans earthquake and commodity price shocks unwind. Corporate sector remains in good shape worldwide, indicating stronger capex, M&A and (eventually) jobs. Euro crisis set to continue until greater support is approved and in place (increased EFSF, eurobonds). Default by Greece remains likely. Subject to Congress, latest Obama package should boost US growth in 2012. Contrast with Europe where fiscal policy is tightening.

Monetary policy on hold US, UK and Eurozone in 2012

Emerging markets growth has moderated, but policy moving to neutral as inflation fears fade More generally, in the post financial crisis economy interest rates are ineffective as households de-leverage - growth is weaker, making activity more vulnerable to shocks e.g. oil and Ag price surge Much of the flow adjustment has taken place in the private sector (running surpluses), issue now is government deficits

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Indonesia Equity Market Outlook 4Q11

JCI Victim of its success

JCI was the best performing market before sell-off ETF volatilities affect JCI volatilities as well

Foreign selling US$1.7bn over the past 2 months and turns into net outflow of US$700m YTD
Weak 1M JCI performance JCI index down 10% over past month

Source: Bloomberg as of Sept 26, 2011

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JCI Valuation is now more attractive

JCI is now trading on 2011E PE of 13x and 2012E PE of 11x, much more reasonable in our view Earnings growth is strong and we expect 3Q results to be in line

(x) 14.0 13.4

Accelerating growth story over the next decade

Regional PE comparison Regional EPS growth comparison

(%) 22.0 20.1 19.9

13.0 11.9 11.8 11.3 11.0 11.0

20.0 18.0 16.0 16.1 14.1 13.6

12.0

Average: 11.3x
10.6 10.4

Average: 14.4%
11.8 10.8 8.6

14.0 12.0 10.0 8.0

10.0 Indonesia India Malaysia Singapore China Phillipines Thailand Hongkong

Indonesia

China

India

Thailand

Phillipines

Hongkong

Malaysia

Singapore

Source: Bloomberg (26 September 2011)

Source: Bloomberg (26 September 2011)

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Risk 1 Bond outflows pressuring IDR

Foreign ownership of government bonds and SBI at US$31bn (32% of total) Estimates another Rp40tr of short-dated bonds and bills due by end 2011 Forex reserves adequate at US$122bn However, at times policymaker slow to supply USD liquidity
Foreign bond holdings 21% of foreign reserves

Source: Citi Investment Research, DMO, Bloomberg

Source: Bloomberg, DMO, UBS Research

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Risk 2 Inflation should be under control

Inflation at 4.8% in Aug is low on a historical basis Core inflation up in Aug but partly due to higher gold and education costs Possible hike in electricity tariff and reduction of fuel subsidy in 2012E But lower commodity prices help to contain inflation
Inflation still manageable Core inflation to ease

Source: Central Bureau of Statistics

Source: CEIC

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Risk 3 IDR weakness but muted impact

Indo corporates have low gearing of 30% as at Dec 2010 Average gross debt to EBITDA of Indonesian corporates at only 1x Indo corporates USD debt exposure limited except mining and plantation companies Banks USD lending is manageable
Gross debt/EBITDA YTD Currencies vs USD

Source: UBS

Source: Bank Indonesia, Central Bureau of Statistics

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Risk 4 Lower commodity prices less impact than feared

China accounts for 10% of total exports hence manageable impact Cash cost of CPO at 40% of current spot price Cash cost of coal miners at 50% of current spot price providing buffer for decline in prices Gearing of listed plantation companies and coal miners relatively low
Indos GDP growth beta to US

Less export contribution from China

Source: Deutsche Bank, CEIC estimates

Source: Deutsche Bank, CEIC estimates

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Growth driver 1 Domestic-driven economy

Indonesia should be less affected of US and Europe slowdown Exports only 25% of GDP - the second lowest in Asia after India

Net reliance on exports 2% of GDP

Low dependence on US and the European economies
Exports as % of GDP Asias Exports by destination

Source: Citi Investment Research

Source: Citi Investment Research

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Growth driver 2 Robust investments

FDI inflows at all time high US$5.1bn in 2Q11 up 60% yoy Domestic investments very strong investment loans up 30% yoy When utilisation rates reach 70%, capex cycle to accelerate

Record High Investments

Manufacturing Utilisation Rate

Source: BKPM (Investment Coordinating Board)

Source: CEIC, Citi Investment Research

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Growth driver 3 Robust consumption

Consumer confidence, retail sales index at high levels

Car sales up 14% yoy in 8M11 despite Japans supply interruption Cement sales up 13% yoy in 8M11 Property marketing sales up 48% in 1H11
Strong consumer confidence index Strong retail sales index

Source: Citi Investment Research, CEIC

Source: Citi Investment Research, CEIC

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Growth driver 4 Room to leverage

GDP per capita reaching US$3,000, the highest ever

Mininum wage increase of 10-15% per annum Debt level at low level versus its regional peers Household debt at 11% of GDP hence room to leverage
Rising income per capita
30%

Underleveraged economy
Total loan/GDP Consumer loan/GDP

25%
20% 15%

10%
5%

0% 2003 2004 2005 2006 2007 2008 2009 2010F

Source: Citi Investment Research, CEIC

Source: Citi Investment Research

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Growth driver 5 Healthy fiscal condition

Indo public sector debt/GDP is at very healthy level Government plans to reduce subsidies 10% increase in power tariff in 2012E Capex spendings to increase by 19% yoy to record level But fuel subsidies remain high less of a problem if crude oil price remains low
Low public sector debt/GDP

Source: CEIC, Government

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Important information
The information in this presentation is based on management forecasts and reflects prevailing conditions and our views as of this date, all of which are accordingly subject to change. In preparing this presentation, we have relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources or which was provided to us by or on behalf of the potential investor or which was otherwise reviewed by us. All opinions or estimates contained in these documents are entirely SIM Indonesia judgement as of the date of this document and are subject to change without notice. Past performance is not necessarily a guide to future performance. You should remember that the value of investments can go down as well as up and is not guaranteed. Exchange rate changes may cause the value of the overseas investments to rise or fall. The information contained in this document is provided for information purpose only and does not constitute any solicitation and offering of investment products. Potential investors should be aware that such investments involve market risk and should be regarded as long-term investments. Derivatives carry a high degree of risk and should only be considered by sophisticated investors. This material is issued by PT. Schroder Investment Management Indonesia and has not been reviewed by the Bapepam. Schroder Investment Management Indonesia Gedung Bursa Efek Indonesia Tower 2, lantai 31 Jend. Sudirman, Jakarta Telephone +62 21 51510101 Fax +62 21 5150505

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