The Outlook for Emerging Market Debt

Transcription

1 The Outlook for Emerging Market Debt March 3, 2016 Rob Drijkoningen Global Co-Head Emerging Markets Debt Hemant Bedarkar Relationship Manager Tel: +31 (0) Tel: +44 (0)

2 EMD Tradable Debt Universe and Size DOMESTIC DEBT MAKES UP 86% OF TOTAL EMD ($ billions) $793 5% $ % Total market over 14 trillion USD EMD Local Currency (LC) represents majority of market share $6,113 41% Growing corporate component in Hard Currency (HC) $6,651 45% Corporate names increasingly issue debt Sovereign HC Corporate HC Sovereign LC Corporates LC Growth potential in EMD LC Source: BofA Merrill Lynch Global Research, BIS, Bloomberg. As of December 31,

3 Review of EMD Sub-Asset Classes HC SOVEREIGN HC CORPORATE LC BONDS Benchmark Emerging Market Bond Index Global Diversified (EMBI GD) Corporate EM Bond Index (CEMBI Broad) Government Bond Index (GBI-EM GD) Benchmark Description USD-denominated debt of Sovereign/Quasi- Sovereign issuers USD-denominated debt issued by corporate entities Liquid, fixed-rate local currency debt of Sovereign issuers Currency Denomination USD USD LC Average Rating (Moody s/s&p) Baa3/BB+ Baa2/BBB Baa2/BBB+ Benchmark Characteristics Countries Asia (%) Europe (%) Latin America (%) Middle East/Africa (%) Yield (%) Duration (Years) Source: JP Morgan, HSBC. As of January 21, The above information is based upon the indices as identified above. Please see the Disclosure Section of this book for a complete description of each index. Actual investment results will vary. It is not possible to invest directly in any index. Past performance is not necessarily indicative of future results. As with any investment, there is the possibility of profit as well as the risk of loss. Lei Wan can provide update 3

4 Review of EMD Sub-Asset Classes SUMMARY STATISTICS 1 (Jan 1, 2003 Dec 31, 2015 HC HC Benchmark Performance SOVEREIGN CORPORATE LC BONDS HC SD Annualized Return (%) Annualized Volatility (%) Sharp Ratio Correlation: U.S. Treasury Correlation: U.S. IG Corp Correlation: U.S. HY Corp Correlation: EM Equity Correlation: U.S. Equity RISK / RETURN OF ASSET CLASSES 2 (Jan 1, 2003 Dec 31, 2015) 15% Annualized Return 12% US Equity EM Equity 9% HC SOVEREIGN U.S. HY Corp HC CORPORATE 6% HC SD LC BONDS U.S. IG Corp US Treasury 3% 2% 8% 14% 20% 26% Annualized Risk 1. Source: Bloomberg and Datastream. Data is from January 1, 2003 to December 31, Source: JP Morgan. Data as of end December Benchmarks used are JPM ELMI+ (LC Money Market), JPM EMBI Global Diversified (HC Sovereign), JPM CEMBI Diversified (HC Corporate), JPM GBI-EM Global Diversified (LC Bonds), JPM EMBI Global Diversified 1-3yr and JPM CEMBI Diversified 1-3yr(HC SD), JPM JULI Aggregate Index (U.S. IG Corporates), Barclays US Corporate HY(U.S. HY Corp), MSCI World (U.S. Equity), MSCI EM Index (EM Equity) and United States Benchmark 10 Year Datastream Government Index(U.S. Treasury).The above information is based upon the indices as identified above. Please see the Disclosure Section of this book for a complete description of each index. Actual investment results will vary. It is not possible to invest directly in any index. Past performance is not necessarily indicative of future results. As with any investment, there is the possibility of profit as well as the risk of loss. 4

5 EM Hard Currency Investment Grade Market Overview The combined investment grade universe of EM HC sovereign and corporates totals over $850Bn Market Cap # Countries # Issuers Avg. Duration EM SOVEREIGNS Investment Grade $392Bn EM CORPORATES Investment Grade $471Bn Source: Neuberger Berman. Data as at January 31, Indices used are the JPM EMBI GD Index and the JPM CEMBI BD Index. 5

6 EM Credit Quality Government Debt levels still much lower compared to DM Improved Debt Sustainability and Credit Quality GENERAL GOVERNMENT DEBT AS A PERCENTAGE OF GDP 1 As of 15 October F 2016F Advanced economies PERCENTAGE OF EMBIG MARKET CAPITALIZATION BY RATING BUCKETS 2 As of January 7, 2016 Emerging market and developing economies 100% 80% NR 60% 40% 20% B BB Investment Grade: 59.9% (As of 29/01/16) 0% IG 1. Source: IMF World Economic Outlook; Neuberger Berman. 2. Source: JP Morgan. The number includes Brazil s loss of investment grade status which is to be reflected in the index on January 29, F: Neuberger Berman Forecast Update from Lei Wan 6

7 Over $1 Trillion USD Wealth Transfer: Who are the Winners? Canada -50bln/-2.9% GDP Norway -50bln/-10% GDP West Europe Excluding Norway +240bln/+1.9% GDP Russia and Central Europe -130bln/-5.6% GDP Japan +73bln/+1.6% GDP US +150bln/+0.9% GDP China +136bln/+1.3% GDP Other Asia +96bln/+1.4% GDP Latin America -73bln/-1.2% Africa -116bln/-7.9% Middle East -370bln/-15% GDP India +83bln/+4% GDP Updated as of January Numbers are USD$. Source: BP, Bloomberg, Neuberger Berman Europe Limited calculations. 7

8 Global Economic Fundamentals Recession Risk The Current Environment Bears Little Resemblance To Past Recessions Start of Recession Yield Curve ISM Mfg. Inf. Trends Capacity Utilization Housing Starts Avg. Wkly Hours Dec-69 Nov-73 Jan-80 Jul-81 Jul-90 Mar-01 - Dec-07 - Present Key: Recessionary Territory Expansionary Territory - Neutral Source: RBC, S&P, NBER, Federal Reserve, BLS, ISM, Census Bureau, Haver, and RBC Capital Markets, Cornerstone Macro. US Recession Risk Indicators Data Through Latest Reading Recession Signal Average Hourly Earnings (3 Mo. Avg. Y/Y%) Nov 2.4% No PCE Deflator (12 Mo. Avg. Y/Y%) Oct 0.4% No CPI Energy (12 Mo. Avg. Y/Y%) Oct -15.7% No Nonfin Unit Labour Costs (4 Qtr. Avg, Y/Y%) Q 0.6% No Residential Construction% Nominal GDP Q 3.4% No Total Investment % Nominal GDP Q 16.2% No Output Gap % Potential GDP Q -1.9% No Domestic Corporate Profits Fin & Nonfin % Nominal GDP 10-Year Treasury and 3-Month T-Bill Spread (3 Mo Avg.) Q 9.3% No Nov 212 bps No Global Short Rates (12 Mo. Avg. Y/Y Ch.) Nov -4 bps No Consumer Non-Mtg Delinquency Rate (ABA) Q 1.36% No BAA Spread Nov 320 bps Yes US Real Trade-Weighted Dollar (2 Yr. % Ch.) Nov 16.5% Yes 8

9 Real Effective Exchange Rates in Emerging Markets Adjustment was mainly in commodity exporters Mar-1996 Aug-1996 Jan-1997 Jun-1997 Nov-1997 Apr-1998 Sep-1998 Feb-1999 Jul-1999 Dec-1999 May-2000 Oct-2000 Mar-2001 Aug-2001 Jan-2002 Jun-2002 Nov-2002 Apr-2003 Sep-2003 Feb-2004 Jul-2004 Dec-2004 May-2005 Oct-2005 Mar-2006 Aug-2006 Jan-2007 Jun-2007 Nov-2007 Apr-2008 Sep-2008 Feb-2009 Jul-2009 Dec-2009 May-2010 Oct-2010 Mar-2011 Aug-2011 Jan-2012 Jun-2012 Nov-2012 Apr-2013 Sep-2013 Feb-2014 Jul-2014 Dec-2014 May-2015 Oct-2015 Commodity Exporters Manufacturing Exporters As of February 05, Manufacturing exporters includes India, South Korea, Philippines, Thailand, Poland, Czech Republic, Hungary, Turkey, Israel, Mexico. Commodity Exporters ex Russia include Brazil, Chile, Colombia, South Africa,Indonesia, Malaysia. Vera 9

10 Macroeconomic Forecasts January 2016 Forecast Real GDP Growth (%, y/y) CPI Inflation (year-end) Budget Balance (% GDP) Current Account (% GDP) Global EM (GDP-weighted) Global EM (GBI-EM-weighted) Global EM (EMBI-weighted) Export Growth (value in US$, % y/y) External Debt (% GDP) Public Debt (% GDP) Global EM (GDP-weighted) Global EM (GBI-EM-weighted) Global EM (EMBI-weighted) EM growth is expected to stay essentially flat from last year, as domestic demand remains weak, lower oil and commodity prices have hurt income and financial conditions in producer economies, and the growth pass-through from strong developed markets is likely to remain impaired due to the strong service-orientation of the DM recovery External debt fundamentals remain reasonable as we see many countries letting their FX to depreciate which works as a safety valve, alleviating the pressure from a credit point of view NB forecasts as of January

11 China: Economic Restructuring Underway rise of the service sector Services share of GDP above 50% in 2015 Growth of Services and Primary Industry have generally held up Manufacturing suffering frictional slowdown as China shift out of low-valued products into high-valued products like semi-conductors and handsets GDP breakdown by Industry (% total GDP) 55% 50% 45% 40% 35% 30% Mar-93 Mar-96 Mar-99 Mar-02 Mar-05 Mar-08 Mar-11 Mar-14 GDP breakdown by Industry (%year-on-year) 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% -5% Mar-93 Mar-96 Mar-99 Mar-02 Mar-05 Mar-08 Mar-11 Mar-14 Secondary Services GDP Primary Secondary Services Sources: CEIC; Neuberger Berman. As of January 18,

12 China: CNY REER back to trend Concerns about CNY devaluation seem overdone, as currency was simply brought back to trend REER appreciation PBoC is likely to keep the USDCNY rate broadly stable to stabilize market sentiment and financial markets CNY Real Effective Exchange Rate Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Sources: CEIC; Neuberger Berman. As of January 18,

13 EM IG Spreads Have Widened Substantially Valuations versus developed markets are compelling in the investment grade space EM Sovereign, Corporate Spreads vs. Global DM Corporates IG Spread Feb-2011 Apr-2011 Jun-2011 Aug-2011 Oct-2011 Dec-2011 Feb-2012 Apr-2012 Jun-2012 Aug-2012 Oct-2012 Dec-2012 Feb-2013 Apr-2013 Jun-2013 Aug-2013 Oct-2013 Dec-2013 Feb-2014 Apr-2014 Jun-2014 Aug-2014 Oct-2014 Dec-2014 Feb-2015 Apr-2015 Jun-2015 Aug-2015 Oct-2015 Dec-2015 EM Sovereigns IG Spread EM Corporates IG Spread Global DM IG Corporates Spread Source: JPMorgan, as of February Indices used: JPM EMBIGD IG Index for EM Sovereigns IG Spread ; JPM CEMBID IG Index for EM Corporates IG Spread ; Barclays Global Agg Corporates Index for Global DM IG Corporates Spread Please refer to the index definitions at the end of this presentation. 13 Vera

14 Demand for EMD Retail flows turned negative, strategic flows have remained positive INFLOWS PER CALENDAR YEAR INVESTOR TYPE US$ billions Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec YTD YTD US/European Mutual Funds Strategic Mandates Source: JP Morgan, EPFR Global, Bloomberg. As of February 10, Tab: JPM EM Bond Flows 14

15 Total Asset Class Return Views Expected Returns for EMD HC Sovereigns and Corporates on 12m Horizon 12 months 12 M Current Expected levels Date Returns 2/10/ % Strong US/Moderate EM US slows/moderate EM EM recovery EM blow up scenario 40% 30% 10% 20% Duration Current T+12m Total Return T+12m Total Return T+12m Total Return T+12m Total Return EMD HC Sovereign Spread vs UST, bps % % % % Expected 10Y UST Yield, % 1.67% 2.3% 2.70% 4.90% 2.20% 1.72% 2.6% 4.27% 1.50% 2.74% Expected total return 7.7% 6.67% 12.72% 13.67% 0.65% EMD HC Corporate Spread vs UST, bps % % % % Spread vs Sovereign, bpt Expected 10Y Yield, % 1.67% 2.3% 2.70% 3.68% 2.20% 1.09% 2.60% 3.16% 1.50% 2.54% Expected total return 3.5% 3.28% 10.27% 11.05% 10.15% EMD HC Sovereign IG Spread vs UST IG, bps % % % % % EMD HC Corporates IG Spread vs UST IG, bps % % % % % As of February 10, Neuberger Berman investment views are formulated by our specialty fixed income teams. For a variety of fixed income sectors we identify a range of outcomes that either may occur or alternatively be anticipated and then priced into the market. For each sector we formulate an investment view based on proprietary fundamental research and quantitative analysis which are used to project expected returns and a confidence level of the return expectation. Each sector team will establish an independent view based on internal research, and a level of confidence in the outlook. The sector view is formulated by identifying various states of the economy and market (i.e. outcomes) expected typically over a 12-month horizon. Each state or outcome is probability weighted to determine the overall sector view. The reassessment of sector views is ongoing and formally updated at least monthly. The above modeled asset class return views are based upon certain assumptions, including the above assumed spread to treasury and expected yield information. If actual spread to treasury and yield data differs from the assumed data above, there is a risk that the modeled asset class return views alike will differ materially from actual asset class return data. Expected Return Forecast May Not Materialize. The expected returns contained herein are being shown to illustrate the investment decision-making process and are not intended to provide any guarantee or assurance about the future returns of any security, asset class or portfolio. Projections or other forward-looking statements regarding future events, targets or expectations are only current as of the date indicated. There is no assurance that such events or projections will occur, and may be significantly different than that shown here. The information in this presentation, including statements concerning financial market trends, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Please see Disclosures at the end of this material. 15

16 Disclaimer Neuberger Berman Investment Funds plc (the Fund ) is authorised by the Central Bank of Ireland (the Central Bank ) as an Undertaking for Collective Investment in Transferable Securities under the European Communities ( UCITS ) Regulations 2011 (S.I. 352 of 2011) of Ireland, as amended. The fund mentioned in this document may not be eligible for sale in some countries and it may not be suitable for all types of investor. Shares in the fund may not be offered or sold directly or indirectly into the United States or to U.S. Persons: for further information see the current prospectus. The Fund is registered in a number of countries: please see the latest Country Registration Matrix on We do not represent that this information, including any third party information, is accurate or complete and it should not be relied upon as such. 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The investments of each portfolio may be fully hedged into the portfolio's base currency: this may reduce currency risks but may also expose the portfolio to other risks such as the default of a counterparty. Economies in Emerging Markets are generally less well regulated and may be adversely affected by trade barriers, exchange controls, protectionist measures and political / social instability. There is a risk of volatility due to lower liquidity and the availability of reliable information. Debt securities of Emerging Market Countries may be subject to greater risk of loss of principal and interest than debt securities issued by obligors in developed countries and may be considered to be predominantly speculative with respect to the issuer's capacity to pay interest and repay principal. Investors who subscribe in a currency other than the base currency of the Fund are exposed to currency risk. Fluctuations in these exchange rates may affect the return on investment. 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