investing in emerging markets: a strategic opportunity
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Investing in Emerging Markets: A Strategic Opportunity. Javier Murcio Deputy Portfolio Manager & Senior Sovereign Analyst. Over the past decade, emerging markets countries have demonstrated well-documented improvements in critical macroeconomic measures: - PowerPoint PPT PresentationTRANSCRIPT
Investing in Emerging Markets: A Strategic OpportunityJavier MurcioDeputy Portfolio Manager & Senior Sovereign Analyst
Progress on Macro Economic Fundamentals
2
Over the past decade, emerging markets countries have demonstrated well-documented improvements in critical macroeconomic measures:
… a decrease in foreign debt ratios,
… an increase in foreign exchange reserves,
… and more credible monetary policies.
Source: Standish and JP Morgan as of September 30, 2011.* Market cap weighted averages for countries in the J.P. Morgan Government Bond Index - Emerging Markets(GBI-EM) Global Diversified.
Foreign Debt (% of Exports)*
0%30%60%90%
120%150%180%
Foreign Exchange Reserves (US$ bn)*
-$10
$40
$90
$140
$190
CPI (% YOY)*
05
1015202530
EM Currencies: No More Pegs
Emerging markets currency valuations are driven by supply-demand conditions. We believe core balance – the sum of current account balance and net foreign direct investment – is the most conservative measure of such conditions.
As global economic activity slowed down, core balances in emerging markets deteriorated significantly in 2008, albeit from a very high level.
Core balances improved significantly in 2009, and we expect them to stay at supportive levels at least for the next couple of years.
3
EM Core Balance (Weighted Average of All Countries in the JPM GBI-EM Global Diversified Index)
2007 2008 2009 2010 2011F 2012F0.0
0.5
1.0
1.5
2.0
2.5
3.0
% o
f GD
P
Source: Standish as of September 30, 2011.
EM Currencies: No More Pegs
The improved balance of payments of EM economies is already conspicuously manifesting itself in the rebounding foreign exchange reserves.
4
Source: Thomson Reuters Datastream, Standish as of July 31, 2011.
Combined Foreign Exchange Reserves of Brazil, Indonesia, Russia, and Turkey
Jan-0
1Ju
l-01
Jan-0
2Ju
l-02
Jan-0
3Ju
l-03
Jan-0
4Ju
l-04
Jan-0
5Ju
l-05
Jan-0
6Ju
l-06
Jan-0
7Ju
l-07
Jan-0
8Ju
l-08
Jan-0
9Ju
l-09
Jan-1
0Ju
l-10
Jan-1
1Ju
l-11
0
200
400
600
800
1000
1200
US
D b
illion
5
EM: No Longer Highly Indebted
Source: International Monetary Fund, World Economic Outlook Database as of September 30, 2011
Fiscal prudence has helped to reduce indebtedness, improving sovereign risk.
Debt ratios have improved significantly and emerging markets are no longer subject to the vagaries of external financing.
This is a big contrast with the direction of developed economies’ leverage.
Debt as Percentage of GDP
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 20160
20
40
60
80
100
120 Advanced economies - public sector debtEmerging and developing economies - public sector debtEmerging and developing economies - foreign debt
Relative Resilience: Growth in EM Continues to Outpace Developed Economies
Emerging markets debt was literally the last “domino” to fall as the global financial crisis intensified in late 2008 due to: Improved creditworthiness of most emerging markets sovereign issuers; Positive growth differentials relative to G-3.
For the same reasons, we believe emerging markets debt should be well supported going forward.
6
Source: International Monetary Fund (IMF) World Economic Outlook (WEO) September 30, 2011. F = Forecast
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
F20
12F
2013
F20
14F
2015
F20
16F
-5.0
-2.5
0.0
2.5
5.0
7.5
10.0 WorldEmerging and Developing EconomiesUnited States
Rea
l GD
P a
nnua
l % c
hang
e
IMF World Economic Outlook
Relative Resilience: Growth in EM Continues to Outpace Developed Economies
According to an IMF study, the share in World GDP accounted for by Emerging Markets will exceed that of the Developed World within the next few years.
The superior growth of Emerging Markets and the development of a middle class in these countries has implications for world trade, deployment of savings (for example in pensions) etc. These are also likely to produce a virtuous cycle, as these countries develop more trading links and also invest in each other.
7
Source: International Monetary Fund as at 30 April 2011
Shares of World GDP Shifting
0
10
20
30
40
50
60
70
80
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
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
Advanced economies Emerging and developing economies
8
Ratings Quality Continues to Improve
Source: Standard and Poor's as at 30 September 2011
After a return to significantly more upgrades than downgrades in 2010, year to date, upgrades and downgrades from S&P are more balanced this year.
One downgrade reflects the changed methodology of S&P, placing a greater emphasis on political risk and other downgrades are mainly on the back of fiscal deterioration
Of the upgraded countries, two attained investment grade (Colombia and Uruguay), while Indonesia was upgraded to one notch below investment grade.
2007 2008 2009 2010 2011 YTD0
2
4
6
8
10
12
14Up Down
Ratings Upgrades vs. Downgrades
9
Ratings Quality Continues to Improve
The trend to upgrade EM countries to investment grade continues.
Index Weights by Rating
Aug-06
Nov-06
Feb-07
May-07
Aug-07
Nov-07
Feb-08
May-08
Aug-08
Nov-08
Feb-09
May-09
Aug-09
Nov-09
Feb-10
May-10
Aug-10
Nov-10
Feb-11
May-11
Aug-11
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%Investment Grade BB B Residual
Source: JP Morgan as at 30 September 2011
EM Bond Fund Flows
Flows had been significant until the recent episode of risk aversion, but they have begun to recover.
10
Cumulative Flows into External and Local EM Bond Funds
Source: Emerging Portfolio.com as of November 10, 2011
-2000
0
2000
4000
6000
8000
10000
12000 external local blended
EM Bond Fund Flows
Both external debt and local currency debt have benefited, although with higher yields and the possibility of currency appreciation, local currency vehicles have benefited more.
11
Monthly Flows into External and Local EM Bond Funds
Source: Emerging Portfolio.com as of November 30, 2011
Dec-1
0
Jan-1
1
Feb-1
1
Mar-1
1
Apr-1
1
May-1
1
Jun-1
1Ju
l-11
Aug-1
1
Sep-1
1
Oct-11
Nov-1
1-2000
-1500
-1000
-500
0
500
1000
1500
2000
2500
3000
external local$mm
New Face of Emerging Markets Debt
● Market capitalization: $811 billion
● Issuers: sovereign
● Average rating: BBB+ (S&P)
● Return drivers: (1) local currencies; (2) local bond yields
● Investor base: predominantly local
12
Market capitalization of emerging markets local-currency-denominated debt has quadrupled in the last five years and now represents approximately two thirds of the total EMD universe.
*UST = US TreasurySource: JP Morgan as of September 30, 2011.
Europe – Ex Russia
Local Bonds (JPMorgan GBI-EM Global Diversified)
Asia29.3%
-26.0%
Russia8.4%
Latin America26.3%
Middle East/Africa10.0%
EM Local-Currency Debt: Unique and Potentially Attractive Sources of Returns EM local-currency bonds enjoy two distinct sources of returns 1) currency, or the local cash
yield plus changes in the spot rate, and 2) duration, or the extra return that local bonds earn relative to local cash – a currency hedged bond return.
Assuming a modest appreciation of EM currencies, we believe EM local-currency bonds have the potential to generate double-digit returns on an annual basis.
13
Source: JP Morgan, Standish as of November 30, 2011
GBI-EM Global Diversified: Currency and Duration Returns
Nov-02
May-03
Nov-03
May-04
Nov-04
May-05
Nov-05
May-06
Nov-06
May-07
Nov-07
May-08
Nov-08
May-09
Nov-09
May-10
Nov-10
May-11
Nov-11
100
125
150
175
200
225
250
275
300
325 Total Return Currency Return Duration Return
US
$ R
etur
n In
dex
Sep-03
Mar-04
Sep-04
Mar-05
Sep-05
Mar-06
Sep-06
Mar-07
Sep-07
Mar-08
Sep-08
Mar-09
Sep-09
Mar-10
Sep-10
Mar-11
Sep-11
5
6
7
8
9
10
Yie
ld, %
EM Local-Currency Debt: Unique and Potentially Attractive Sources of Returns We believe the steady positive local duration returns (suggesting that local bonds have
outperformed currency forwards) reflect the positive term premium of local yield curves. Bond managers, however, can use currency forwards to invest in countries where the currency is attractive, but not prospective duration returns. In several EM countries, inflation-linked bonds are also available.
14
Source: JP Morgan as of September 30, 2011
GBI-EM Global Diversified: Yield to Maturity
New Face of Emerging Markets Debt
Market capitalization: $436 billion
Issuers: sovereign and quasi-sovereign
Average rating: BB+ (S&P)
Return drivers: (1) spreads over UST*; (2) UST* yields
Investor base: predominantly foreign
15
Emerging markets debt (EMD) consists of two distinct asset classes: local-currency-denominated bonds and dollar-denominated bonds.
The two asset classes are different in their country composition, creditworthiness, return drivers, and investor bases, yet both are fairly liquid.
*UST = US TreasurySource: JP Morgan as of September 30, 2011.
US$-Denominated Bonds (JPMorgan EMBI Global)
Asia17.9%
Europe- Ex Russia20.1%
Russia10.1%
Latin America44.5%
Middle East/Africa7.5%
EM US$-Denominated Debt: Risk/Return Profile
We believe that given the improvement in the weighted average credit quality of the asset class to BB+, at current levels sovereign spreads may offer more than adequate compensation for the potential credit losses.
Our research suggests that historically BBs outperform other rating categories over the complete credit cycle.
16
Source: JP Morgan as of November 30, 2011
JPM EMBI Global: Spreads Over US Treasuries
May-02
Nov-02
May-03
Nov-03
May-04
Nov-04
May-05
Nov-05
May-06
Nov-06
May-07
Nov-07
May-08
Nov-08
May-09
Nov-09
May-10
Nov-10
May-11
Nov-11
0
100
200
300
400
500
600
700
800
900
1000
bps
Important Information
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