Regina Chi, CFA VP & Portfolio Manager Global Equity Team AGF Investments Inc.

Deglobalization, Technology and Implications for Emerging Markets Investing , Technology and Implications

Globalization: Deglobalization: Technology & AI: 150 Years In The Making Tipping Points Deglobalization Risks

Our view: • Emerging markets have been major beneficiaries of . We believe a plateauing and even potential reversal of trade openness will create winners and losers within EM, but not necessarily the usual suspects. • Technology is more likely to drive some deglobalization and result in a change in trade patterns and who participates in the global . Risks here are underappreciated. • Technology will also form new growth opportunities for to relocate production, not only because of cost but numerous other benefits, which will help boost returns over time.

Please see appendix for the full disclaimer. 2 For advisor use only. Deglobalization, Technology and Implications Two main drivers: Policy (tax & trade) and technology

Globalization: Deglobalization: Technology & AI: 150 Years In The Making Tipping Points Deglobalization Risks

Please see appendix for the full disclaimer. 3 For advisor use only. Deglobalization, Technology and Implications Driving Forces: Lower Taxes, Tariffs, Tech and Credit

Globalization: Deglobalization: Technology & AI: 150 Years In The Making Tipping Points Deglobalization Risks

50% 14 35 45% 12 30 40% 10 25 DM Average 8 20 Tariffs in Advanced 35% Corporate Tax Rate 6 15 Economies 30% EM Average 4 10 Tariffs in EM and Developing Corporate Tax Rate Economies (rhs)

25% 2 5

%, Simple Average Simple %, Corporate Tax Rate Tax Corporate 20% 0 0

1980 1985 1990 1995 2000 2005 2010 2015

1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Source: KPMG, Barclays Research as of March 2017. Source: IMF, Barclays Research as of March 2017.

20 800

15 400 YoY Increase in Gross Private 10 0

Domestic Investment yield 5 US$ Billion US$ -400 YoY Increase in Non-Financial Corporate Sector Debt

U.S. Govt. 10 year year 10 Govt. U.S. 0

-800

Jan-81 Jan-83 Jan-85 Jan-87 Jan-89 Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15

Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15

Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Source: Bloomberg as of December 31, 2016, 4Q16. Source: ILO based on AMECO database and ILO database. March 31, 2016.

Please see appendix for the full disclaimer. 4 For advisor use only. Deglobalization, Technology and Implications Resulting in Low and Less Volatile Inflation…

Globalization: Deglobalization: Technology & AI: 150 Years In The Making Tipping Points Deglobalization Risks

40

30 Deglobalization

1970s Stagflation 20 The Gold Standard

Hyperglobalization

10 % 0

-10

-20

-30 1875 1885 1895 1905 1915 1925 1935 1945 1955 1965 1975 1985 1995 2005

Global CPI-ex Germany Inflation Global CPI Inflation

Source: Macrohistory Database, Barclays Research as of March 2017.

Please see appendix for the full disclaimer. 5 For advisor use only. Deglobalization, Technology and Implications …and Low Volatility in Growth

Globalization: Deglobalization: Technology & AI: 150 Years In The Making Tipping Points Deglobalization Risks

Accelerated globalization brought the Great Moderation: A period of historically low volatility in global growth

0.12 Deglobalization (1914-1945)

0.1

0.08

0.06 Second Globalization (1946-1990) Great Moderation (1870-1914) 0.04 During Hyperglobalization (1990-2007) 0.02

0 1875 1885 1895 1905 1915 1925 1935 1945 1955 1965 1975 1985 1995 2005

5-Year Rolling Standard Deviation of Global Real GDP Growth

Source: Macrohistory Database, Barclays Research as of March 2017.

Please see appendix for the full disclaimer. 6 For advisor use only. Deglobalization, Technology and Implications Globalization Winners: EM Economies & Multinationals

Globalization: Deglobalization: Technology & AI: 150 Years In The Making Tipping Points Deglobalization Risks

Emerging Market Economies Net Margin, Multinational vs. Domestic Companies* Gained Share in Global GDP 12% 60

55 10%

50 8% 45 6% 40

35 4%

30 2% 25

20 0%

1950 1960 1970 1980 1990 2000 2010

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 EM GDP Share (% of World GDP) G7 GDP Share (% of World GDP) Multinational Companies Domestic Companies

Source: World Economics, Barclays Research as of March 2017. *Representative of US, S&P 500 and Russel 2000 companies. Source: Bloomberg, AGF Est as of June 2017.

Please see appendix for the full disclaimer. 7 For advisor use only. Deglobalization, Technology and Implications Globalization – Benefited EM Middle Class and Upper, with DM Middle Class Incomes Stagnating

Globalization: Deglobalization: Technology & AI: 150 Years In The Making Tipping Points Deglobalization Risks

Real incomes over 20 years, cumulative change 80 Global Growth Incidence Curve, DM 70 1988-2008 Upper Class 60

50

40 EM Middle Class 30

Real PPP Income PPP Real 20 DM Middle 10 Class

Cumulative Growth Rate (%) of of (%) Rate Growth Cumulative 0 0 10 20 30 40 50 60 70 80 90 100 Percentile of Global Income Distribution

Source: Lakner and Milanovic. Data available at: http://go.worldbank.org/nwbukI3.JP0. BCA Research, December 9, 2016.

Please see appendix for the full disclaimer. 8 For advisor use only. Deglobalization, Technology and Implications Technology & = DM Growth Without Employment

Globalization: Deglobalization: Technology & AI: 150 Years In The Making Tipping Points Deglobalization Risks

DM Growth without employment Labour share in DM economies fell (1970-2014) 300 0 250 -5 200 Real Output -10

150 (Percent) Employment 100 -15 50 1980 1990 2000 2010 Source Left Chart: Financial Times, March 2017. Source Right Chart: ILO based on AMECO database and ILO database, March 2017.

Please see appendix for the full disclaimer. 9 For advisor use only. Deglobalization, Technology and Implications

Globalization: Deglobalization: Technology & AI: 150 Years In The Making Tipping Points Deglobalization Risks

We believe there are risks as the main winners from hyper-globalization could see a counter movement:

• Demographic tailwind, access to cheap labour and high exports could become a headwind • EM economies most exposed to the global value chain are at risk of being disrupted • Multinationals who were able to leverage Global Value Chain and wage & tax differences between regions see their advantage diminish

Please see appendix for the full disclaimer. 10 For advisor use only. Deglobalization, Technology and Implications Automation & Robotics, Still Early Stages with Plenty of Room for Growth

Globalization: Deglobalization: Technology & AI: 150 Years In The Making Tipping Points Deglobalization Risks

Robot Price, Quality Adjusted* Density of Manufacturing Robots** 100 700 90 600 80 70 500 60 400 50 40 300

Robot Price ($) Price Robot 30 200 20 10 100 0 0 1990 1994 1998 2002 2006 2010

Source: BCA, Intl federation of Robotics, OECD. Jan 2018 **Number of manufacturing robots per Source: BCA, Intl federation of Robotics. Jan 2018 *Log =100, Avg price in US & Europe 100k employees Please see appendix for the full disclaimer. 11 For advisor use only. Deglobalization, Technology and Implications Technology & AI: Lowering Cost & Disrupting the Value Chain

Globalization: Deglobalization: Technology & AI: 150 Years In The Making Tipping Points Deglobalization Risks

Factory, Development Employees Restocking 500k capacity time

Adidas 160 2-3 months (est) <1 week Speedfactory

China Avg. 1,200+ 12-18 months 2-3 months

Source: Siemens, Adidas, AGF est. as at March 2017.

Please see appendix for the full disclaimer. 12 For advisor use only. Deglobalization, Technology and Implications Automation & AI: Disproportionate Impact on EM, DM Losses May be Offset by Repatriation

Globalization: Deglobalization: Technology & AI: 150 Years In The Making Tipping Points Deglobalization Risks

% of jobs at risk of automation* 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Thailand S. Africa US Germany UK Negative Scenario Base Case

*Adjusted for wage rates and slower pace of tech adaptation. Data are gross numbers and do not include new job adds from automation. Source: as at March 2017.

Please see appendix for the full disclaimer. 13 For advisor use only. Deglobalization, Technology and Implications Most at Risk: Global Value Chain could be Disrupted

Globalization: Deglobalization: Technology & AI: 150 Years In The Making Tipping Points Deglobalization Risks

Participation in global value chain* EM Asia appears most exposed 100 90 80 70 60 50 40 30 20 10 0 Singapore Korea S. Africa China Thailand Japan Taiwan Canada U.S. Peru Brazil India Colombia

*Foreign value added used in country’s exports (upstream) plus value added supplied to other exports (downstream) divided by total exports. Source: Unctad, Barclays, AGF as of March 2017.

Please see appendix for the full disclaimer. 14 For advisor use only. Deglobalization, Technology and Implications Most Exposed to the U.S. Deglobalizing, Directly & Indirectly

Globalization: Deglobalization: Technology & AI: 150 Years In The Making Tipping Points Deglobalization Risks

Bilateral Trade with U.S. in Final and Intermediate Goods Bilateral Trade with China in Final and Intermediate Goods

Source: OECD, Barclays Research as of March 2017.

Please see appendix for the full disclaimer. 15 For advisor use only. Deglobalization, Technology and Implications In its Favour, EM Leads in Productivity Gains and There’s Still Plenty of Upside

Globalization: Deglobalization: Technology & AI: 150 Years In The Making Tipping Points Deglobalization Risks

Labour Productivity Gains EM vs. DM*

6

5

4

% 3

2

1

0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 EM World DM

*Data is real PPP adjusted GDP per person employed, data is smoothed. Source: Conference Board Total Economy Database, Econ Weekly as at March 2015.

Please see appendix for the full disclaimer. 16 For advisor use only. Deglobalization, Technology and Implications EM Rate of Domestic Consumption Growth Expanding vs. DM

Globalization: Deglobalization: Technology & AI: 150 Years In The Making Tipping Points Deglobalization Risks

10 9 8 7 6

% 5 4 3 2 1 0 1995-2004 2005-2014 China India Developing Asia* Advanced Asia** Australia United States

Data is real household consumption annual growth. *Indonesia, Malaysia, Philippines, Thailand. **HK, Singapore, Korea, Taiwan. Source: IMF, Thompson Reuters as at March 2016.

Please see appendix for the full disclaimer. 17 For advisor use only. Deglobalization, Technology and Implications Certain EM Countries are Quickly Catching up in Technology & Innovation

Globalization: Deglobalization: Technology & AI: 150 Years In The Making Tipping Points Deglobalization Risks

R&D Spend to GDP Patents Granted*

Bubble Size: R&D Volume US$B PPP CAGR During 2011-2016 25% EU: +8%; JP: -1%; KR: +4%; CN: +22%; US: +7% 400,000 20% Thailand 350,000 300,000 15% 250,000 China Philippines 200,000 10% Malaysia 150,000 year CAGR year Singapore - Indonesia 5 Taiwan Korea 100,000 Hong Kong Germany 5% Japan 50,000 India U.K. Australia U.S. 0 0% 2011 2012 2013 2014 2015 2016 0.00 1.00 2.00 3.00 4.00 5.00 European Applicant Korean Applicant USA Applicant R&D to GDP Ratio (%) Japanese Applicant Chinese Applicant

Source Left Chart: OECD, UBS as of Sept 2017. Source Right Chart: IP5 Offices, UBS as of Sept 2017. *Includes only IP5 Office patents granted data.

Please see appendix for the full disclaimer. 18 For advisor use only. Deglobalization, Technology and Implications Driven by Innovation, IT is Now a Bigger Weighting in EM at the Expense of Energy and Materials.

Globalization: Deglobalization: Technology & AI: 150 Years In The Making Tipping Points Deglobalization Risks MSCI Emerging Markets Index – Sector Weighting

2008 Current IT, 27% 35.0%

30.0% Financials, 22% Financials, 23% 25.0%

Energy, 19% 20.0%

Materials, 16% 15.0% Cons Disc, 9%

Telecom, 11% Materials, 8% 10.0% Energy, 7% IT, 10% 5.0% Cons Staples, 7% Industrials, 8% Industrials, 5% 0.0% Cons Disc, 5% Telecom, 4% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Cons Staples, 5% IT Energy + Materials Source: MSCI, Thomson Reuters Datastream, HSBC, August 2018.

Please see appendix for the full disclaimer. 19 For advisor use only. Conclusion

Reversal of globalization may not mean return to previous norms of winners and losers, and tech may upend historical precedent.

Potential Winners / Less Impacted: • Countries with strong domestic consumption and highly-educated labour force • Companies with strong IP / Patents (Tech, Pharma & Industrial) • Services or strong brands with limited substitutes (Health Care) • Basic materials and agriculture At Risk: • Global Value Chain countries and companies, especially low-tech manufacturing • Multinationals, especially those dependent on Global Value Chain, tax, and labour arbitrage • Companies with weak brands dependent on scale • Shipping and global distribution companies

Please see appendix for the full disclaimer. 20 For advisor use only. Attributes We Look For:

High R&D spend, continue to Balance sheet strength, ability to invest in IP and patents quickly invest in new technologies

Upside to asset turnover and ROIC, Avoid companies with disruption risk ability to consistently earn an either to new tech or Global Value EVA of CFROI > WACC Chain disintermediation

Please see appendix for the full disclaimer. 21 For advisor use only. Disclaimers

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Please see appendix for the full disclaimer. 22 For advisor use only. Disclaimers

AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), AGF Investments America Inc. (AGFA), Highstreet Asset Management Inc. (Highstreet) AGF Asset Management (Asia) Limited (AGF AM Asia) and AGF International Advisors Company Limited (AGFIA). AGFA is a registered advisor in the U.S. AGFI and Highstreet are registered as portfolio managers across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. AGF AM Asia is registered as a portfolio manager in Singapore. The subsidiaries that form AGF Investments manage a variety of mandates comprised of equity, fixed income and balanced assets. This document may not be reproduced (in whole or part), transmitted or otherwise made available to any other party without the prior written consent of AGF Investments Inc. Publication Date: September 17, 2018.

Please see appendix for the full disclaimer. 23 For advisor use only. AGF.com/Global

Please see appendix for the full disclaimer. For advisor use only.