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The World Bank & International Finance Corporation Securities Markets Annual Conference 2010 Developing Local Currency Bond Markets in Emerging Economies Washington, DC June 16, 2010 Cynthia Steer Chief Research Strategist Managing Director, Beta Research Telephone: 203-656-6716 [email protected]

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The World Bank & International Finance CorporationSecurities Markets Annual Conference 2010

Developing Local Currency Bond Markets in Emerging Economies

Washington, DC

June 16, 2010

Cynthia SteerChief Research Strategist

Managing Director, Beta ResearchTelephone: 203-656-6716

[email protected]

2 2

Global Asset Class Performance During the Crisis

3 3

2008 Asset Class Returns

2.10

-2.35

5.24

10.118.01

-25.91

-47.72

-37.30

-43.06 -41.70

-10.91

-53.18

-19.86

-60.0

-50.0

-40.0

-30.0

-20.0

-10.0

0.0

10.0

20.0

%

2008 Returns

Cash ILBs Core FI Dev FI Unhdgd Dev FI Hdgd

High Yield Global REITs U.S. Equity Dev EQ Unhdgd Dev EQ Hdgd

EMD EME NDHF

Source: Bank of America- Merrill Lynch, Barclays Capital, Citigroup, FTSE, HFRI, J.P. Morgan, MSCI, Russell

4 4

2009 Asset Class Returns

0.17

11.415.93 4.36 2.38

55.23

38.26

28.3432.46

21.7628.19

79.02

9.69

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

%

2009 Returns

Cash ILBs Core FI Dev FI Unhdgd Dev FI Hdgd

High Yield Global REITs U.S. Equity Dev EQ Unhdgd Dev EQ Hdgd

EMD EME NDHF

Source: Bank of America- Merrill Lynch, Barclays Capital, Citigroup, FTSE, HFRI, J.P. Morgan, MSCI, Russell

5 5

2010 YTD Asset Class Returns

0.04

2.943.71

-4.92

2.32 2.87

-2.34

-0.32

-12.08

-5.79

2.28

-5.07

0.90

-14.0

-12.0

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

%

2010 YTD Returns

Cash ILBs Core FI Dev FI Unhdgd Dev FI Hdgd

High Yield Global REITs U.S. Equity Dev EQ Unhdgd Dev EQ Hdgd

EMD EME Hedge Funds

Source: Bank of America- Merrill Lynch, Barclays Capital, Citigroup, FTSE, HFRI, J.P. Morgan, MSCI, Russell

6 6

2009 Themes vs. 2010 Themes

2009 2010

Company Re-Rating Country Re-Ranking/Sovereign Risk

De-Risk vs. Re-Risk: Currency (Risk Assessment & Diversification into Non-Dollar Stores of Value)

• Liquidity Planning vs. Inflation/Deflation(Role of Real Assets including Commodities, Farmland, Timber, Infrastructure, Frontier Mkts)

• Opportunistic Investing (Credit/Distressed, Inflation-Linked Assets, Quality, Emerging Assets)

Company Re-Rating

Country Re-Ranking / Sovereign Risk Active Management / Strategies to Capture Macroeconomic Uncertainty (e.g. hedge funds)

Inflation/Deflation Fixed Income Perils: Benchmarks, Rising Rates

Currency Risk Stimulus Withdrawal

7 7

The Flight to Junk

5.9

-3.6

55.2

28.2

4.411.4

28.3

-10.0

0.0

10.0

20.0

30.0

40.0

50.0

60.0

BC Aggregate

BC U.S. Treasury

Citigroup High Yield

JPM EMBI Global

Citigroup Non-U.S.

WGBI (unhedged)

BC U.S. TIPS

Russell 3000

2009 Returns

Source: Barclays Capital, Citigroup, JPMorgan, Russell

In a complete reversal from 2008, investors clamored for risky assets with lower quality instruments performing the strongest.

8 8

Emerging Market Debt Timeline

Latin Defaults

1980s

1982

Development of secondary market for sovereign EMD

loans

1990

1994

Tequila Crisis - Mexican peso devaluation

Asian Crisis

1997

1998

Russian defaults

2003

Mexico first country to retire

Brady Bonds

Argentina Defaults

2001

Russia upgraded to investment grade - by year end, 45% of the

universe is investment grade

2003

Brady Bonds issued - further accelerated growth of debt

markets

2003 - 2007

Philippines, Colombia, Brazil, and Venezuela

retire Brady debt

1996

80% of EMD index is classified as below investment grade

Market DebtEmerging

2008

The prospect of defaults by Greece and Dubai World raised concerns regarding

global sovereign creditworthiness

2009

Brazil upgraded to investment grade

9 9

Sovereign Yields Changes

0.4

-0.2

0.3

-0.4

0.4

1.6

0.1

1.0

0.40.2

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

U.S. Japan U.K. Germany France

%

2-Year versus 10-Year Yield ChangesMajor Components of the Global Bond Market

Change in 2-Year Yield Change in 10-Year Yield

Source: Bloomberg

10 10

Country Re-Ranking

Iceland, Greece, Spain, and Portugal have all been downgraded by S&P, but remain investment grade.

S&P cut Latvia and Romania’s credit rating to junk status.

Brazil was upgraded to investment grade in April, 2008. China, Lebanon, and Peru have also been upgraded.

Source: The New York Times, 2 February 2010

Standard and Poors Ratings:

11 11

Country Re-Ranking – Recent S&P Rating Changes

Estonia’s credit rating was upgraded from A- to A as the former Soviet Union state will become a member of the eurozone in January 2011.

Georgia’s credit rating was upgraded from B to B+ in April 2010.

Greece’s credit rating was downgraded to junk status from BBB+ to BB+.

Indonesia’s credit rating was upgraded from BB- to BB in March 2010, after the central bank boosted the country’s economic growth forecasts.

Jamaica’s credit rating was upgraded from selective default to B-, following a successful domestic debt restructuring.

Portugal’s credit rating was downgraded by two notches, to A- from A+ due to concern’s of Greece’s financial crisis contagion spreading through the euro region.

Spain’s credit rating was downgraded by a notch to AA from AA+.

Turkey’s credit rating was upgraded to BB from BB- due to improvements in debt burden.

Ukraine’s credit rating was upgraded to B from CCC+ based on improvements in the country’s policy coordination and a Russian gas subsidy agreement that boosted the government’s debt outlook.

12 12

Geographic DiversityJPM EMBI Global Countries by Rating

Brazil Mexico Russia Turkey The Philippines Venezuela

Indonesia Colombia Malaysia Lebanon Peru Panama

Poland China Uruguay Kazakhstan South Africa Ukraine

Chile Argentina El Salvador Lithuania Hungary Vietnam

Croatia Bulgaria Pakistan Egypt Sri Lanka Serbia

Gabon Ghana Tunisia Dominican Republic Ecuador Georgia

Jamaica Belize

Investment Grade

A- and Higher

BBB+, BBB, BBB-

Below Investment Grade

BB+ BB, BB-

B+, B, B-

CCC+ and Lower

S&P Long-Term Foreign Currency

Debt Rating

13 13

EMD More Resilient than High Yield Throughout the Crisis

0.0000

500.0000

1000.0000

1500.0000

2000.0000

Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10

OAS

(bp

s)

BC Emerging Markets (U.S. Dollar) Index BC U.S. Corporate High Yield Index

Source: Barclays Capital

14 14

EMD Maintained More Normal Volatility Characteristics Compared to Other Fixed Income Asset Classes

Developments in Systemic Asset ClassesIMF Risk Assessment based on the Volatility and

Level of Spreads

15 15

The New World: Emerging Markets as a Core Asset Class

16 16

Mathematics in modeling informs client decision- making. Modeling must incorporate a wider range of outcomes and scenarios to improve clients’ ability to analyze and manage risk.

Governance ensures effective decision-making and implementation. Conversations on portfolio positioning must be more dynamic and governance must be more nimble.

Economics links changes in the real economy to changes in the financial assets in our portfolios. A forward-looking view that captures the potential outcomes of shifts in macroeconomic realities is key.

With the idea that staff and Boards will be more dynamic and critical in their thinking, we have sought to provide dynamic tools, not solutions, to facilitate critical thinking and comprehensive decision-making in the current environment. The tools strive to use models (mathematics) to capture economic realities or potentialities (economics) to frame asset allocation decisions for governance bodies (governance). These tools strive to help investors reorient their portfolios under evolving market conditions.

The Three-Legged Stool of Asset Allocation

17 17

2010 Assumptions vs. Actual History

Disclosure:All numbers represent Rogerscasey’s forward-looking asset class assumptions, and as such, reflect estimates as of a certain date. These assumptions are not a guarantee of future performance, do reflect high levels of uncertainty, and are subject to change without notice.

2007 2008 2009Avg.

ReturnStd.Dev

Cmpd Ret

Cash 4.9% 2.1% 0.2% 3.8% 2.4% 3.7%

Inflation Linked Bonds 11.6% -2.3% 13.9% 5.3% 6.5% 5.1%

Core Fixed Income 7.0% 5.2% 7.6% 5.1% 8.5% 4.8%

Dev. Mkts. Fixed Income (Unhedged) 11.5% 10.1% 10.7% 5.2% 11.0% 4.6%

Dev. Mkts. FI (Hedged) 4.9% 8.0% 2.9% 4.8% 6.0% 4.6%

Real Estate (unlevered) 15.8% -6.5% -16.8% 7.0% 13.0% 6.2%

High Yield 1.8% -26.0% 50.2% 6.8% 15.0% 5.7%

Global REITs -7.0% -47.7% 33.4% 8.1% 19.0% 6.4%

US Equity 5.1% -37.3% 24.8% 9.2% 19.3% 7.5%

Developed Equity (Unhedged) 11.6% -43.1% 30.6% 9.7% 22.0% 7.5%

Developed Equity (Hedged) 2.9% -41.7% 15.8% 9.2% 19.3% 7.5%

Global Equity (Unhdgd) 9.6% -40.3% 28.4% 9.4% 20.5% 7.5%

Global Equity (Hdgd) 3.7% -39.9% 19.2% 9.2% 19.3% 7.5%

Emerging Markets Debt (50% LC) 12.4% -8.8% 23.7% 8.4% 14.5% 7.4%

Emerging Markets Equity 40.3% -53.7% 73.4% 12.5% 27.0% 9.2%

Private Equity 19.3% -7.1% 14.6% 28.0% 11.1%

Non-Directional Hedge Funds 7.7% -19.0% 9.8% 7.5% 7.0% 7.3%

Actual Returns

Asset Class

2010 Assumptions

18 18

Historical Perspective on Asset Allocation

0

10

20

30

40

50

60

1990 1995 2000 2010Alternatives Hedge Funds EM Equity Global Fixed Income Int'l Dev Fixed Income Int'l Dev Equity

Sub-allocation within Int’l EQ

EM EQ, EMD – sub-asset class to EM EQ infrastructure

EMD, EQ Derivatives, Distressed Debt

All asset classes, including domestic equity and debt

Emerging

None Developed Developed Developed

EM Exposure

Currencies

Diversification and emerging markets: more asset classes and strategies now incorporate EM, but we should start with bonds.

19 19

Strong Underlying Fundamentals:GDP Estimates & Forecasts

IMF World Economic OutlookGDP Estimates and Forecasts 2008 2009 2010

Global 3.1 -1.4 2.5

Developed Economies 0.8 -3.8 0.6

EM and Developing Economies 6.0 1.5 4.7

Africa 5.2 1.8 4.1

Source: IMF

20 20

0

20

40

60

80

100

120

140

160

180

0

200

400

600

800

1,000

1,200

Dec-

06

Mar

-07

Jun-

07

Sep-

07

Dec-

07

Mar

-08

Jun-

08

Sep-

08

Dec-

08

Mar

-09

Jun-

09

Sep-

09

Dec-

09

Cum

ulat

ive

Purc

hase

s ($

Bill

ions

)

Cumulative Purchases MBS - OASSource: Federal Reserve Board, Barclays Capital, PIMCO

Mortgage Spread vs. Federal Reserve Board MBS Purchases

MBS O

AS (bps)

Quantitative Easing – the Fed’s Massive $1.75 Trillion Security Purchase Program

The Federal Reserve Board initiated a $1.75 trillion quantitative easing program, whereby it purchased longer-dated MBS, agencies, and treasuries in order to keep interest rates low and provide support to the housing market.

As a result, MBS spreads tightened dramatically in 2009.

The Fed expects to halt and ultimately wind down the quantitative easing program beginning in March 2010. The wind-down may cause mortgage rates to rise and home prices to suffer from price deterioration.

21 21

Central Banks Cut Rates Sharply

Source: Economy.com

Country Central Bank Target Rates (12/31/09)

1 Year

Change

United States 0.00%-0.25% -

Eurozone 1.00% -150 bps

United Kingdom 0.50% -150 bps

Japan 0.10% -

Australia 3.75% -50 bps

Canada 0.25% -125 bps

South Korea 2.00% -100 bps

Thailand 1.25% -150 bps

Brazil 8.75% -500 bps

22 22

“Non Traditional” Policy Tools Have Made Life More Complex

$0

$500

$1,000

$1,500

$2,000

$2,500

1/2/2008 5/21/2008 10/8/2008 2/25/2009 7/15/2009 12/2/2009

Asset Composition of the Fed’s Balance SheetCurrency outstanding

SDRs (Special Drawing Rights)

Gold stock

Liquidity Swaps

Other

Maiden Lane LLC (Bear Stearns)

CPFF

Other credit extensions

TALF

AIG

ABCP

Broker-dealer credit

Primary/Secondary Credit

Term auction credit

Repos

MBS

Agencies

Treasuries

The Fed wound down some of its emergency credit facilities as liquidity returned to markets, but the Fed’s balance sheet did not shrink substantially as the Fed expanded its purchases of agency, mortgage, and treasury securities in the open market.

Source: Federal Reserve Board

23 23

Unemployment Rates on the Rise with Structural Issues

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Dec-08 Mar-09 Jun-09 Sep-09 Dec-09

Eurozone U.S. Japan U.K. Source: Economy.com

24 24

Deflation vs. Inflation in Global Markets

9.1%

4.8% 4.8%

12.8%

5.7%

2.9%

7.2%

10.1%

3.7%

1.0%2.7%

-1.3%-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

Arge

ntin

a

Braz

il

Mex

ico

Egyp

t

Hun

gary

Pola

nd

Russ

ia

Turk

ey

Thai

land

Euro

zone

U.S

.

Japa

n

Year-over-Year Change in CPIfor the Year Ending February, 2010

Source: Bloomberg

25 25

Strong Underlying Fundamentals:Positive Trade Balances

4.4%

-1.3% -1.2%

-3.0%

3.6%

-1.9%

3.4%4.9%

7.8%

0.9%

-0.7%

-2.6%

1.9%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

Arg

enti

na

Bra

zil

Mex

ico

Hun

gary

Russ

ia

Turk

ey

Sout

h Ko

rea

Tha

iland

Chi

na

Indon

esia

Euro

zone

U.S

.

Japan

Current Account Surplus as a % of GDP

Source: Bloomberg

26 26

Emerging Market Currency Appreciation

-40.0%

-20.0%

0.0%

20.0%

40.0%20

02

2003

2004

2005

2006

2007

2008

2009

Q1

2009

Q2

FX Rates (Change in Units Per U.S. Dollar)

Brazil Mexico Korea Thailand Russia South Africa

Source: IMF

27 27

EMD & Equity Experience Positive Net Flows in 2009

-$111,056

-$43,886

-$43,657

-$7,913

-$3,266

-$3,185

$9

$22

$128

$6,885

$31,191

$60,190

$139,530

-$200,000 -$100,000 $0 $100,000 $200,000

U.S. Equity

Global Equity

EAFE Equity

U.S. & Global Alternatives

Global Real Estate

EAFE Fixed Income

U.S. Real Estate

Global Hedge Funds

U.S. Hedge Funds

Emerging Markets Fixed Income

Emerging Markets Equity

Global Fixed Income

U.S. Fixed Income

Estimated 2009 Net Flows by Asset Class (in Millions)

Source: pionline.com, eVestment Alliance

28 28

Emerging Market Debt as Core Fixed Income

29 29

The Emerging Markets Universe Continues to Expand

A new frontier of smaller countries will provide new opportunities in dollar-denominated and local currency issuance.

Flows will continue but will broaden by currency, by structure, by duration, and by asset class.

The combination of liquid and illiquid investments will be the norm.

Emerging markets will likely continue to migrate towards investment grade ratings and provide a driver for global growth as well as a viable option for diversification in the midst of further global financial turmoil.

The evolution of emerging markets debt by instrument will continue as structured products, corporate credit, derivatives, and complex money markets will continue to develop.

30 30

Emerging Market External Bond Issuance by Sector & Rating

0

40

80

120

16020

06 (

Jan-

Jun)

2006

(Ju

l-D

ec)

2007

(Ja

n-Ju

n)

2007

(Ju

l-D

ec)

2008

(Ja

n-Ju

n)

2008

(Ju

l-D

ec)

2009

(Ja

n-Ju

n)

Billi

ons

of D

olla

rs

Corporate/ Banks Investment Grade Corporate/ Banks Subinvestment Grade

Sovereign/Agencies Investment Grade Sovereign/Agencies Subinvestment Grade

Source: IMF

31 31

The Case for Local Currency EMD:Attractive Risk/Return Profile

10.0%

11.0%

12.0%

13.0%

14.0%

15.0%

16.0%

8.0% 9.0% 10.0% 11.0% 12.0%

Risk/Return for EMD Indices 1/2002 – 5/2010

JPM EMBI+ JPM GBI-EM Global 50% JPM EMBI+ / 50% JPM GBI-EM Global

Source: J.P. Morgan

32 32

EMD Offers an Attractive Risk/Return Profile

-12.0%

-8.0%

-4.0%

0.0%

4.0%

8.0%

12.0%

0.0% 4.0% 8.0% 12.0% 16.0% 20.0%

Risk/Return for EMD vs. Other AssetsThree Years ending February, 2010

JPM EMBI+ JPM GBI-EM Global

Barclays Capital U.S. Aggregate Barclays Capital U.S. Treasury: U.S. TIPS

Citigroup High-Yield Market Barclays Capital Global Aggregate

MSCI World

Source: Barclays Capital, Citigroup, J.P. Morgan, MSCI

33 33

The Emerging Markets Universe Continues to Expand

Market Value($millions)

# of Bonds Yield Mod. Duration

JPMorgan EMBI Global (Hard Currency) $356,680 226 6.61 6.92

JPMorgan GBI-EM (Local Currency) Broad Div $1,195,000 289 6.68 4.46

JPMorgan CEMBI Broad (EM Corporate Credit) $245,343 390 6.63 5.02

Barclays EM GovernmentInflation Linked Index

$259,147 59 5.56 5.95

Bank Loans

Brady Bonds

Eurobonds / Yankees

Global Bonds

EM Corporate Derivatives Local

Markets

Longer Duration

Local Markets

1980s 1990s 2000s

Source: JPMorgan, Barclays Capital

34 34

3.0%

3.1%

3.6%

6.4%

6.7%

7.4%

10.0%

10.4%

12.0%

12.2%

0.0% 5.0% 10.0% 15.0%

Lebanon

Malaysia

Colombia

Indonesia

Venezuela

The Phillipines

Turkey

Russia

Mexico

Brazil

Top Ten Country Exposures

Dollar-Denominated EMD Investable Universe

JP Morgan EMBI Global Index

Average Credit Quality: BB+

Average Yield = 6.6%

Average Duration = 6.9 years

Average Life: 11.9 years Source: J.P. Morgan

Africa, 2.6%

Asia, 19.7%

Europe, 28.9%

Latin America,

45.2%

Middle East, 3.6%

Regional Composition

35 35

2.3%

4.9%

5.3%

6.2%

7.1%

8.5%

10.1%

13.0%

15.8%

23.4%

0.0% 5.0% 10.0% 15.0% 20.0% 25.0%

Colombia

Hungary

Indonesia

Turkey

Thailand

South Africa

Malaysia

Mexico

Poland

Brazil

Top Ten Country Exposures

Local Currency EMD Investable Universe

JP Morgan GBI-EM Global Index

Average Credit Quality: A-

Average Yield = 7.3%

Average Duration = 4.0 years

Average Life: 5.8 years Source: J.P. Morgan

MiddleEast Africa, 8.7%

Asia, 22.4%

Europe, 29.1%

Latin America,

39.8%

Regional Composition

36 36

2.4%

3.9%

4.2%

5.2%

5.5%

6.1%

9.5%

11.4%

17.1%

18.7%

0.0% 5.0% 10.0% 15.0% 20.0%

China

India

Qatar

Singapore

Mexico

UAE

Korea

Hong Kong

Russia

Brazil

Top Ten Country Exposures

Corporate EMD Investable Universe

JP Morgan CEMBI Broad Index

Average Credit Quality: BBB

Average Yield = 6.6%

Average Duration = 5.0 years

Average Life: 8.1 years Source : J.P. Morgan

MiddleEast Africa, 13.7%

Asia, 36.8%

Europe, 19.3%

Latin America,

30.1%

Regional Composition

37 37

Emerging Markets Inflation-Linked Bonds

5.3

55.7

3.2 3.20.7

11.6

1.4

7.8

11.2

5

12

16

6

1

9

14 5

0

10

20

30

40

50

60

Argentina Brazil Chile Columbia South Korea

Mexico Poland South Africa

Turkey

Barclays Emerging Markets Government Inflation-Linked Bond Index

Percentage of Index # of Bonds

Emerging countries have issued a healthy level of inflation-linked bonds; diversification by country and issue continues to evolve.

Source: Barclays Capital

38 38

Forward-Looking Asset Allocation

39 39

Favorable Forward-Looking View of Emerging Market Debt Along the Risk vs. Reward Spectrum

Cash

ILB's USFI

Hdgd Dev FI

RE

HY REITs

USEQUnh Dev EQ

Emrg FI

Emrg EQ Priv EQ

NDHF

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0%

Nom

inal

Ret

urn

(%)

Std. Dev. of Nominal Return (%)

40 40

EMD: A Mainstay in Portfolios

A positive forward-looking view for EMD is reflected in a 5-10% allocation at the portfolio level.

Ranges Ranges

Diversified Cash / Gold (currency) 20.0% 15%-25% 14.0% 5%-20%

ILB's 15.0% 10%-20% 9.0% 6%-12%

Global Fixed Income / Muni's 22.0% 15%-30% 8.0% 5%-12%

Real Estate / Infrastructure 10.0% 5%-15% 4.0% 2%-8%

High Yield / High Yield Bank Loans 0.0% 0%-5% 3.0% 0%-5%

Global REITs 0.0% 0.0% 3.0% 2%-7%

Emerging Mkt. Debt 5.0% 3%-10% 7.0% 3%-10%

Emerging Mkt. Equity 8.0% 5%-12% 12.0% 5%-15%

Private Equity / Commodities 3.0% 0%-5% 10.0% 5%-15%

NDHF 5.0% 0%-8% 10.0% 5%-15%Global Equity (unhdgd) 12.0% 9%-20% 20.0% 10%-30%

Total 100.0% 100.0%

Post Modern Portfolio

Allocation

Capital Preservation

Allocation

41 41

Summary: Opportunities Within the Broadened EMD Universe

The attraction of emerging markets and EMD as an investment class has deepened materially since the mid-nineties.

Today, investors must simply put more assets to work in emerging markets, creating a conundrum.

Within investment programs, the evolution of EMD is morphing from simply opportunistic core plus allocations or segregated dollar mandates to strategic allocations to local currency, corporate credit, private equity, direct lending, real estate, and beyond.

However, many investors are not balancing allocations but primarily focusing on emerging market equity - possibly creating bubble conditions.

Flows to the emerging markets must continue in both investment and non-investment grade, but should also broaden by currency, by structure, by duration, and by asset class.

In addition, derivative capabilities must deepen in order to accommodate long-short strategies.

42 42

Summary: Opportunities Within the Broadened EMD Universe

The combination of benchmark-sensitive and benchmark-aware mandates will be prevalent. In addition, significant flows will go to liquid and illiquid strategies.

For the aging populations of the developed nations, liability-driven investing cannot be successfully executed without emerging market long-duration nominals and inflation-linked bonds (linkers).

Frontier markets will become a more accepted part of investment portfolios as developing countries provide the driver for global growth in the coming years.

In short, domestic, global fixed income, and traditional emerging market debt will separate into investment and non-investment grade over the next decade.

That being said, investors need to adjust to assessing country by country, from custodian relationships to stock selection to possible capital controls.