havesting value emd citywire wealth manager conference - march 2013
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Harvesting Value in thgof Emerging
A if T JArif T. JoPortfolio Manager,
For ProfessionalFor Professional
he Multiple Segmentsp gMarket Debt
hi CFAoshi, CFAManaging Director
l Investors Onlyl Investors Only
Global Market CapitalisationEmerging Market Debt is a Significant a
Total Emerging Market Og g(17% of Global Debt M
Local Debt Markets = $9.7T
Corporate2.2
Sovereign5.1
Quasi-sovereign
2.5
For Professional
All data as of 31 December 2011Data does not include debentures, mortgages, credit cards and other household debt.Source: ING, BIS, Lazard
and Growing Segment of the Market
utstanding Debt = $14.8T gMarket Capitalization)
External Debt Markets = $5.1T
Sovereign/Quasi-sovereign
Bonds0.7
Corporate Loans1.7
Sovereign Loans (Lateral)
0.8
1.7
Sovereign Loans (Other)
1.2
Corporate Bonds0.8
l Investors Only 2 Lazard Asset Management
I di d C F ll OEvolving Universe
Hard Currency Universe (70+ Countries)*
Indices do not Capture Full Oppo
Hard Currency Universe (70+ Countries)Latin America Argentina Aruba Bahamas
B b d
Asia China Fiji India
I d i
Eastern Europe Albania Azerbaijan Belarus
B i
Africa/M.E. Algeria Angola Bahrain
Côt d’I i Barbados Belize Bolivia Brazil Cayman Islands Chile
C l bi
Indonesia Hong Kong Malaysia Mongolia Pakistan Philippines
S h ll
Bosnia Bulgaria Croatia Czech Republic Georgia Hungary
K kh t
Côte d’Ivoire Congo Egypt Gabon Ghana Iraq
I l Colombia Costa Rica Dominican
Republic Ecuador El Salvador
G d
Seychelles South Korea Sri Lanka Thailand Vietnam
Kazakhstan Latvia Lithuania Macedonia Poland Romania
R i
Israel Jordan Kuwait Lebanon Morocco Namibia
Ni i Grenada Guatemala Jamaica Mexico Panama Peru
T i id d
Russia Serbia Turkey Ukraine
Nigeria Oman Qatar Senegal South Africa Tunisia
U A E Trinidad Uruguay Venezuela
U.A.E. Zambia
As of 31 December 2012
Corporates, Inflation Linked Bonds, and ma
For Professional
* Red highlighted countries represent those in the JPM EMBI Global Diversified Index (55 countries) for Hard CurLocal MarketsSource: J.P. Morgan
i S
Local Market Universe (45+ Countries)*
ortunity Set
Local Market Universe (45+ Countries)Latin America Argentina Brazil Chile
C l bi
Asia China India Indonesia
H K
Eastern Europe Belarus Czech Republic Georgia
H
Africa/M.E. Angola Botswana Egypt
Gh Colombia Costa Rica Dominican Republic Mexico Peru Uruguay
Hong Kong Malaysia Mongolia Pakistan Philippines Singapore
S th K
Hungary Kazakhstan Poland Romania Russia Serbia
T k
Ghana Kenya Israel Malawi Mauritius Namibia
Ni i South Korea Sri Lanka Thailand Vietnam
Turkey Ukraine
Nigeria South Africa Tanzania Uganda U.A.E. Zambia
any countries are not represented in indices
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rrency and JPM GBI-EM Global Diversified Index (15 countries) for
D fi i H d C & LDefining Hard Currency & Loc
Denomination
Duration
Yield (%)
# of countries
A R tiAverage Rating
% Sovereign
% Quasi-Sovereigng
% Corporate
Annualized return* (%)
Annualized standard deviation* (%)
Worst monthly loss* (%)
Data as of 31 December 2012Hard Currency = JPM EMBI Global Diversified; Local Currency = JPM GBI-EM Global Diversified.* The return and risk characteristics presented for Hard Currency and Local Currency represent the period betwe
Sharpe Ratio*
For Professional
Shown for illustrative purposes only, not a product managed by Lazard.Past performance is not a reliable indicator of future results. Source: Lazard, JPMorgan
l C I dical Currency Indices
Hard Currency Local Currency
USD EM currencies
7.7 years 4.4 years
4.5 6.1
55 15
BBB BBB+BBB- BBB+
77.7 100
22.3 0
0 0
11.0 12.3
8.9 11.9
-16.0 -14.1
een January 2003 to September 2010.
1.0 0.9
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Fiscal Position and Debt/GDPD l d W ldDeveloped World
Emerging Market fiscal deficits much lower than the le
Emerging Market Debt/GDP ratios exhibit long-term
Strong Fiscal Indicators in EM(Fiscal Deficit as % GDP)(Fiscal Deficit as % GDP)
0
4
-4
0
-12
-8
-162001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E2013F2014F
United Kingdom
Data through October 2012
United States
Eurozone
Emerging Markets
For Professional
gForecasted or estimated results do not represent a promise or guarantee of future results and are subject to chanSource: IMF
P Ratios Much Better than
evels of developed markets
m stability
Lower Debt / GDP Ratios in EM(Debt as % GDP)(Debt as % GDP)
100
120
60
80
20
40
02001 2003 2005 2007 2009 2011 2013F
United Kingdom
United States
Eurozone
Emerging Markets
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nge.
Th Hi t f E i M kThe History of Emerging MarkEMBIGD
1600Asian Financial
1200
1400
Asian Financial Crisis
Russian Default LTCM Blowup
1000
1200
Mexico Upgraded to Investment Grade
Argentina Default
Brazil Election Turmoil
600
800 Russia UpInvestmen
LSD
200
400
D
0
Dec
-97
Dec
-98
Dec
-99
Dec
-00
Dec
-01
Dec
-02
Dec
-03
Dec
-04
Sovereign Spread represented by stripped spread (in bps) of JPMorgan EAverage credit rating of the JPMorgan EMBI Global Diversified Index [RH
Improved credit quality has led to
For ProfessionalAs of 31 December 2012Source: JP Morgan
k t S i S dket Sovereign SpreadsSpread
BB+
BBB-
BBGlobal Financial Crisis
US Downgraded
BB-
pgrade to nt Grade
Local Debt Issuance Surpasses External Debt Issuance
Greek Debt Crisis
B+
Debt IssuanceBrazil Upgraded to Investment Grade
BD
ec-0
5
Dec
-06
Dec
-07
Dec
-08
Dec
-09
Dec
-10
Dec
-11
Dec
-12
EMBI Global Diversified Index [LHS]HS]
lower spreads and lower volatility
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C Diff i i i h KWide and Diverse OpportunityCountry Differentiation is the Key
2000
1600BBBA & AA B
800
1200
EMBIG Spread (162 bps) June 1, 2007
EMBIGJanuary
400
0
Chi
naC
hile
Mal
aysi
aP
olan
dB
razi
lB
ulga
riaC
olom
bia
Kaza
khst
anLi
thua
nia
Mex
ico
Pan
ama
Per
uR
ussi
aou
th A
frica
Uru
guay
Cro
atia
El S
alva
dor
Hun
gary
Gab
onG
eorg
ia
K So E
31-Jan-13
1-Jun-07
As of 31 January 2013
Credit re-rating st
For Professional
yFor Belarus, Croatia, Gabon, Georgia, Ghana, Jamaica, Jordan, Kazakhstan, Lithuania, Nigeria, Sri Lanka there historical spread. S&P does not rate Côte d’Ivoire and Iraq. Source: JPM and S&P.
y Set within Sovereign Credity
BB B N/A
Spread (262 bps) y 31, 2013
Geo
rgia
Indo
nesi
aJo
rdan
Nig
eria
Phili
ppin
esS
erbi
aTu
rkey
Arg
entin
aB
elar
usin
ican
Rep
Ecu
ador
Egy
ptG
hana
Jam
aica
Leba
non
Paki
stan
Sri
Lank
aU
krai
neVe
nezu
ela
ote
DIv
oire
Iraq
Bel
ize
P
Dom
VC
o
tories still persist
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is no available data on June 1, 2007. We used instead the tightest
Corporate Analysis:O i f E i M k COverview of Emerging Markets C
Deep and Diverse Market Over 750 emerging market corporate issuers from 40+
Issue sizes range from <$100 million to over $2.5 billio
Maturities range from one year to perpetualsMaturities range from one year to perpetuals
Growing Percentage of EM Debt Stock Since 2005, emerging market corporates have issued m
Emerging market corporates are expected to represent
Future development: liquid, tradeable EM corporate bof CDS (currently only 15 euroclearable local currency
Strong Fundamentals and Resilience During C Credit ratings of most EM corporates are restricted by
Balance sheet indicators tend to be much stronger in E
During 2008-2009 crisis, EM corporates exhibited lowof stronger balance sheets and liquidity support from s
EM corporates aggressively bought-back debt during c
Important that EM corporates manage balance sheets
For ProfessionalAs of 31 December 2012 and is subject to change.Source: JP Morgan, Lazard
C D b M kCorporate Debt Market
+ emerging market countries
on
more debt than emerging market sovereigns
t 75% of all new issuance 2011-2013
onds denominated in local currency and expanded use y corporates from 5 countries)
Crisisy sovereign ceiling
EM when compared to similarly rated global comparables
wer default rates than their global market peers as a result sovereigns via discounted loans
crisis in order to monetize lower value of bonds
when looking to expand globally (organic or acquisition)
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EM Off V lEmerging Markets Corporate EM Offers Value
EM Corporate Spread vs. US Corporate Spread(Investment Grade)
300
200
250IG = + 85 bps
150
50
100
0Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12
CEMBI Diversified IG - IG U.S. Corporates
For ProfessionalAs of 31 January 2013Source: JP Morgan and Barclays Capital
Debt vs Developed Markets
EM Corporate Spread vs. US Corporate Spreadp p p p(Non-Investment Grade)
2000
1500 BB = +93 bpsB = +271 bps
500
1000
0
-500Dec-05 Dec-07 Dec-09 Dec-11
CEMBI Diversified BB - U.S. Corporates (BB)
CEMBI Diversified B - U.S. Corporates (B)
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EM Off M Th % Pi kEM Local Yields Versus US YEM Offers More Than a 5% Pick-
800800
600
400
200
0Jan-07 Jun-07 Nov-07 Apr-08 Sep-08 Feb-09 Jul-09 Dec
— EM Yield minus 5-year UST yield
Room for EM rates to com
y y
For ProfessionalAs of 31 January 2013Source: Lazard, JP Morgan
V US T iYields-up Versus US Treasuries
c-09 May-10 Oct-10 Mar-11 Aug-11 Jan-12 Jun-12 Nov-12
e down relative to US rates
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We believe EM Real Interest R l ti t D l d W ldRelative to Developed World
Real Interest Rates
4.0
5.0(%)
3.0
4.0
1.0
2.0
0.0
-2.0
-1.0
an es ny es ia nd na es ia ey ea
As of 31 January 2013
Japa
Phi
lippi
ne
Ger
man
Uni
ted
Sta
te
Ind
Thai
lan
Chi
n
Phi
lippi
ne
Indo
nes
Turk
e
Kor
e
For Professional
yReal interest rates are estimated as the difference between the current nominal 10-year rate and consensus inflaSource: Lazard, JP Morgan, Haver Analytics
Rates Remain Attractive
ia ia ia ca co ru nd ia le ia ry zil
Nig
er
Mal
ays
Rus
s
Sou
th A
fric
Mex
ic
Per
Pol
an
Col
omb
Chi
Rom
an
Hun
gar
Bra
z
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ation forecast 2 years ahead
V l 2008 P C i i L lEM Currencies Have Room toValues at 2008 Pre-Crisis Levels
REER Changes Since Pre-Crisis
115
120
110
115
105
100
90
95
Dec 07 Dec 08 Dec 09Dec-07 Dec-08 Dec-09
EM
For ProfessionalAs of 31 January 2013Source: Lazard, JP Morgan, Haver Analytics
o Appreciate
Dec 10 Dec 11 Dec 12Dec-10 Dec-11 Dec-12
M REER
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D i f R t i E iDrivers of Returns in Emergin
Emerging Market Local Debt Returns
23 030
40
(%)
7 79.7
11.2
6.7 11.411.7
4.33.1
6.3
7.3
6.7 6.9 7.1
8.0
7.5
6.7
6.7
6.0
16.9
23.0
6.3
15.218.1
22.0
15.716.8
0.7
10
20
0.9
4.4 4.4 1.6-0.4
2.8 2.8 4.71.7
7.7-0.1
-4.8
-16.0
-10.2
0.40.5 -5.2 -1.8
0.7
20
-10
0
-40
-30
-20
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20132003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Return from CarryReturn from F/XReturn from Rate MovementsLocal Debt Total Return
As of 31 January 2013External debt returns reflect the JPM EMBI Global Diversified Index.Local debt returns reflect the JPM GBI-EM Global Diversified Index.
Yields Plus Potential FX Appreciatio
For Professional
This is not intended to reflect the performance of any product or strategy managed by Lazard.Past performance is not a reliable indicator of future results.Source: J.P. Morgan
M k t D btng Markets Debt
Emerging Market External Debt Returns
8.0
22 2
29.840
(%)
16.28 8
30.7
11.0
9.1
8.0
7.36.7
8 1 6 0
4.40.45.5
10.45.3 10.6
2.1
22.2
11.610.2
9.9 6.2 12.2
7.4
17.420
3.38.8
4.9
-6.0 1.0
-9.1
11.0
-0.46.6 8.1 6.0 5.8 4.6
-3.1-5.9 -1.7 -8.9 -5.6
-12.0
7.4
-1.3
0
-30.5
-40
-20
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20132003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Return from USTReturn from CarryReturn from Spread CompressionExternal Debt Total Return
on & Spread Compression Attractive
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E i M k t D bt HEmerging Markets Debt Has a
Risk/Return Chart for 10 Years Ended 31 December 2
12
14Return (%)
8
10
EM
Hard C
4
6
Global Aggregate Hedged
US Aggregate Global A
EM
US Credit
US Treasury
2
4 gg g g
3-Month LIBOR
00 2 4 6
Emerging Market Debt has outperformed other ass
Hard Currency EMD = JPM EMBI Global Diversified; Local Debt EMD = JPM GBI-EM Global Diversified ; EM CuBC US High Yield; Global Agg Hedged = BC Global Agg USD Hedged; Global Agg Unhedged = BC Global Agg UBC US Long Treasury Index ; US Credit = BC US Credit IndexThis is not intended to reflect the performance of any product or strategy managed by Lazard. All data as of 31 December 2012;Time period represents the longest shared history of all the asset classes. (the
Emerging Market Debt has outperformed other ass
For Professional
; p p g y (January 2002.)Past performance is not a reliable indicator of future results. For illustrative purposes only.Source: Lazard, Bloomberg
Di bl P fila Discernable Profile
2012
Local Debt EMD
Currency
Currency EMD US High Yield
US Long Treasury
Aggregate Unhedged
CurrencyGlobal Aggregate ex-US Unhedged
8 10 12 14
set classes on an absolute and risk-adjusted basis
Standard Deviation
urrency = JPM ELMI+; US Aggregate = BC US Aggregate; US High Yield = Unhedged; 3-Month LIBOR = ML 3-Mo USD LIBOR ; US Long Treasury =
Local Debt EMD benchmark, JPM EMBI Global Diversified, launched in
set classes on an absolute and risk adjusted basis
l Investors Only 14 Lazard Asset Management
, ,
Ri k Di lRisk Disclosures
All data contained herein is sourced by Lazard Asset Management unless otherwis
Certain information included herein is derived by Lazard in part from an MSCI indor report, and does not endorse or express any opinion regarding this product or rsource of any such information or analysis. MSCI makes no express or implied waany Index Data or data derived therefrom. The MSCI Index Data may not be furthproducts.
This is a financial promotion and is not intended to be investment advice. In the Uto professional investors and advisers authorised to carry out business under the F
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Securities identified in this document should not be considered as a recommendatassumed that any investment in these securities were or will be profitableassumed that any investment in these securities were, or will be, profitable.
Past performance is not a reliable indicator of future results. Fluctuations in the racurrency of investment may have the effect of causing the value of your investmenand the income from them is not guaranteed and can fall as well as rise due to marless than you originally invested.
Yields from bonds reflect in part the risk rating of the bond issuer. Investment in lcapital of the fund. High yielding assets may carry a greater risk of capital values fa
Investments in emerging markets carry an above-average degree of risk due to the should consider carefully whether or not investment in emerging markets investminvestments should be.
This financial promotion is issued and approved by Lazard Asset Management Limincorporated in England and Wales with registered number 525667. It is authorise
The contents of this document are confidential and should not be disclosed other
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se noted.
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t are internal titles and do not necessarily imply any legal status or responsibility.
tion or solicitation to purchase, sell or hold these securities. It should also not be
ate of exchange between the currency in which shares are denominated and the nt to diminish or increase. Investors are reminded that the value of investments rket and currency movements. When you sell your investment you may get back
lower rated bonds increases the risk of default on repayment and the risk to alling or have limited prospects of capital growth or recovery.
undeveloped nature of the securities markets in those countries. Investors ents is suitable for them and, if so, how substantial a part of their portfolio such
mited, 50 Stratton Street, London W1J 8LL Lazard Asset Management Limited is ed and regulated by the Financial Services Authority.
than to the person or persons for whom it is intended.
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