Emerging Name Market Bonds - What to avoid and what to treasure Claudia Title Calich, Fund Manager

Transcription

1 Emerging Name Market Bonds - What to avoid and what to treasure Claudia Title Calich, Fund Manager October Date

2 Flexible, unconstrained EM fund M&G Emerging Markets Bond Fund Fund launch: October 1999 Fund manager: Claudia Calich (since December 2013) Deputy fund manager: Fund size: Charles de Quinsonas million YTM (gross of ongoing charges): 7.23% Share classes*: European sector: GBP, EUR, EUR hedged, USD, CHF Morningstar Global Emerging Markets Bond Copyright 2015 Morningstar UK Limited. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. The Morningstar Rating is an assessment of a fund s past performance based on both return and risk which shows how similar investments compare with their competitors. A high rating alone is insufficient basis for an investment decision. Source: M&G, 30 September Ratings at 31 August 2015 and should not be taken as recommendations. *Please note, share classes may not be registered for sale in all regions

3 Total return (01/12/2013 = 100) Performance in euros M&G Emerging Markets Bond Fund Morningstar Global Emerging Markets Bond sector average Source: Morningstar Inc, Pan European database, 30 September 2015, euro A share class, gross income reinvested, price to price

4 Total return (01/12/2013 = 100) Performance in dollars M&G Emerging Markets Bond Fund Morningstar Global Emerging Markets Bond sector avg Source: Morningstar, Inc., Pan European database, 30 September 2015, USD A share class, gross income reinvested, price to price

5 Claudia Calich Biography Joined M&G in October 2013 as a specialist in emerging markets debt and was appointed fund manager of the M&G Emerging Market Bond Fund in December Also fund manager of the M&G Global Government Bond Fund and deputy fund manager of the M&G Global Macro Bond Fund since July 2015 Has over 20 years experience in emerging markets, most recently at Invesco in New York, where she was a senior portfolio manager and lead manager of the Invesco Emerging Market Bond and Global High Income funds. She was lead manager for Invesco s institutional emerging market separate accounts Prior to this, Claudia was with Oppenheimer Funds and also held positions at Fuji Bank, Standard & Poor s and Reuters She graduated with a BA honours in economics from Susquehanna University and also holds an MA in international economics from the International University of Japan in Niigata

6 Agenda Macro update & government bonds Emerging market corporate bonds Fund positioning

7 Emerging markets risks today Risks Slowing growth: cyclical vs. structural issues China, commodity prices, Fed, fiscal / BoP pressures, adjustment fatigue Bottom up idiosyncratic risks need to be managed properly as many credits deteriorate Technicals: can cope with slow outflows, but larger outflows will widen spreads Source: M&G, September 2015

8 Emerging markets opportunities today Opportunities / where we see value Commodity importers benefitting (Eastern Europe, South Asia) Exporters benefitting from weaker currencies Bottom up idiosyncratic risks can be profitable if managed properly (Ukraine, Petrobras) Currency longs: INR, MXN, HUF; Shorts: PEN, SGD Local bonds: India, Hungary, Mexico, Colombia Central America / Caribbean sovereigns to benefit from US recovery Source: M&G, September 2015

9 Index Index A tale of two EMs: adjusting to lower growth Manufacturing PMIs EM vs developed Manufacturing PMIs EM countries PMI differential (rhs) Developed economies (lhs) Emerging economies (lhs) Some countries are in a different part of the cycle and may not need to hike rates following the Fed Sources: M&G, HSBC / Markit PMIs, 30 September

10 Which countries are most affected by a falling oil price? Net oil trade as % of total GDP Georgia Czech Republic Russia Hungary Poland Ukraine Kazakhstan Mongolia Turkey Azerbaijan Morocco Jordan Algeria Libya Egypt Iraq Iran India China S. Korea Mexico Colombia Ecuador Peru Venezuela Brazil Nigeria Kuwait Thailand Sri Lanka Indonesia Philippines Malaysia Vietnam Chile (as % of GDP): Imports more than 5% Imports between 5% and 0% Exports between 0% and 5% Exports between 5% and 10% Exports more than 10 % Argentina South Africa Source: JP Morgan, November 2014

11 Exports to China Countries most exposed to slowdown in China % of country s total exports Source: CIA World Factbook, February 2015

12 % Rising US rates which countries win or lose? US interest rates forward curve On a country level, winners and losers from an expected FED hike Winners Mexico Central America (others) Eastern Europe Losers Brazil Turkey South Africa month EUR/USD futures Source: M&G, Bloomberg, 19 October Curve shown is Eurodollar 3M futures curve.

13 Yield Since the talk of tapering, EM assets have already been absorbing US rate tightening 3.4% 3.1% 2.8% 2.5% 2.2% 1.9% 1.6% 1.3% 0.9% 0.8% 0.7% 0.6% 0.5% 0.4% 0.3% 0.2% 0.1% 0.0% Yield UST 10-yr UST 2-yr (RHS) Source: M&G, Bloomberg, 16 October 2015

14 RUB ARS CHF INR CNY JPY GBP NOK ZAR CLP MXN TRY MYR COP BRL Total returns % bps Risk premiums are adjusting YTD currency total returns Spreads on hard currency emerging market debt vs US dollar denominated debt 10 5 Best spot returns Worst spot returns EM government bonds EM corporate bonds Sources: M&G,, Bloomberg, JPMorgan indices: JPM EMBI Global Diversified Blended Spread Index, JPM CEMBI Diversified Broad Composite Blended Spread Index. Update to 20 October

15 Source: Central banks of Dominican Republic, Honduras, Guatemala, El Salvador; World Bank; December 2014; remittances as % of GDP from World Bank December 2013 Remittances 4 countries that benefit from higher US growth Dominican Republic remittances are 7% of GDP* Guatemala remittances are 10% of GDP* 15% 10% 5% 13.0% 11.0% 2.5% 14.2% 15% 10% 5% 5.5% 6.1% 9.2% 6.8% 8.6% 0% 0% -5% -10% -5.0% -1.6% -5% -10% -15% -9.3% 15% 10% 5% 0% -5% -10% -15% El Salvador remittances are 16% of GDP* 7.3% 6.7% 5.0% 2.0% 1.5% -9.5% 15% 10% 5% 0% -5% -10% Honduras remittances are 17% of GDP* 11.3% 6.0% 6.0% 1.9% 0.8% -5.5%

16 US$ billions US$ billions EM fixed income fund flows Annual cumulative bond fund flows USD $ billions New issuance: external sovereign and corporate debt Less inflows into bond funds in 2014, but bond issuance has remained resilient Source: Fund flows from EPFR 31 July 2015; Issuance data from JP Morgan at 30 June 2015 Sovereign Corporate

17 Agenda Macro update & government bonds Emerging Markets corporate bonds Fund positioning

18 Diversification benefits Opportunities across diverse geographies and sectors EM external corporate debt by geography EM external corporate debt by sector Middle East 16% Africa 6% 40% 35% 30% 25% Latin America 28% Asia 38% 20% 15% 10% Europe 12% CEEMEA 34% 5% 0% Source: Bloomberg, JPM CEMBI Broad Diversified Index, 21 August 2015.

19 Spread bps Opportunities in EM corporate bonds Significant risk premium for investing in EM corporate bonds Emerging market corporate spreads vs US and Europe 1,600 1,400 1,200 1, Emerging markets United States Europe Source: Bloomberg, 19 October 2015

20 Historic default rates forecast 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 4.3% 2.5% EM HY default rate US HY default rate EM default rates remain at relatively low levels, but should rise over the next few months Source: Bloomberg, Bank of America Merrill Lynch, 30 September 2015 (2015 forecast from JP Morgan)

21 Agenda Macro update & government bonds Emerging markets corporate bonds Fund positioning

22 Asset allocation across all available EM opportunities M&G Emerging Markets Bond Fund EM corporate debt local currency 4.0% Fund Neutral position EM corporate debt hard currency 36.9% EM govt debt hard currency EM corporate debt hard currency 33% EM govt debt hard currency 33% 45.2% EM govt debt local currency 33% EM govt debt local currency 8.0% Source: M&G, 30 September Neutral position defined as composite index composed of 33% JP Morgan EMBI Global Diversified, 33% JP Morgan CEMBI Broad Diversified, and 33% JP Morgan GBI EM Global Diversified indices

23 Asset allocation dynamics M&G Emerging Markets Bond Fund 100% Asset class split Cash 100% Currency split 90% 90% 80% 80% 70% Government bonds 70% Hard 60% 60% 50% 50% 40% neutral 40% neutral 30% 30% 20% 10% 0% Corporate bonds 20% 10% 0% Local Source: M&G, 30 September 2015

24 Top country positions by total risk M&G Emerging Markets Bond Fund OVERWEIGHTS UNDERWEIGHTS Top 5 overweights Fund weight Neutral weight VaR difference Top 5 underweights Fund weight Neutral weight VaR Difference Ivory Coast 1.84% 0.34% 0.39% Brazil 3.66% 5.20% -0.43% Dominican Republic 1.36% 0.74% 0.37% South Africa 1.36% 5.16% -0.38% Armenia 1.64% 0.09% 0.37% Poland 0.00% 4.69% -0.32% Honduras 1.65% 0.10% 0.28% Nigeria 0.00% 0.89% -0.23% Bulgaria 1.42% 0.00% 0.26% Malaysia 0.00% 4.62% -0.21% Total risk is calculated via an internal algorithm considering FX risk, duration risk, credit risk and country bonds Source: M&G as of 30 September 2015 (we calculate all the risk drivers ratings, currency, duration, country of risk to generate an aggregate ranking)

25 Currency exposure M&G Emerging Markets Bond Fund 90% 80% Fund Neutral position -0.8% 3.4% 70% 3.4% 60% 2.3% 50% 1.7% 40% 1.6% 30% 1.4% 20% 1.1% 10% 0.2% 0% -10% -2.5% -2.7% Source: M&G, 30 September 2015

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