Emerging Market Debt Environment October 2014
EM Dollar Debt Posts Gains after Difficult 2013 2
EM vs. DM Growth Stabilizing at Lower Spread Real GDP Growth Rate Differential: Emerging Market Premium over Developed Markets (2014 2018 IMF Estimates) 7 6 5 4 3 2 1 0 1 Source: IMF, World Economic Outlook Update, April 2014 3 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 2011 2010 2012 2013 2014 2015 2016 2017 2018 2019 Realized Average: 2.36%
Current Account Deficits have Stabilized Fragile Five YoY Change in Current Account As of June 30, 2014 Average Current Account Balance As of July 31, 2014 Change in Current Account YoY (%) 4 3.5 3 2.5 2 1.5 1 0.5 0 0.5 1 Improving Current Account Brazil India Indonesia South Africa Turkey Worsening Current Account Current account deficits from the Fragile Five have begun to improve, while balances in EM remain in surplus on aggregate. 4 Source: FactSet, IMF
EM Currencies have Re Priced to Competitive Levels JP Morgan Emerging Market Currency Index December 2012 September 2014 Fragile Five Currency Panic Subsiding December 2012 September 2014 Index Level Local Currency vs. USD 110 105 100 95 90 85 80 Brazil India Indonesia South Africa Turkey 75 70 Dec 12 Jun 13 Dec 13 Jun 14 Pullback in U.S. interest rates and defensive central bank policies shore up Fragile Five currencies 5 Source: FactSet, IMF, JP Morgan
A Heavy 2014 Election Cycle in EM has been Mostly Favorable to Date 23 countries, 40% of the world s population, holds elections in 2014 Lithuania May Ukraine May Hungary Spring 2014 Romania 2014 South Korea - April Costa Rica February El Salvador February Panama -May Colombia March Brazil October India May/June Indonesia April Bolivia October Uruguay October Argentina 2015 Namibia November South Africa April-July Egypt Begins January Algeria April Libya 2014 Tunisia 2014 Turkey March Iraq April Lebanon - May 6 Source: JPMorgan
Investors have Returned to EM Debt Weekly EM Fund and ETF Flows 3 2 Fed announces Tapering plans; Tourists leave the asset class 1 U.S. $, billions 0 (1) (2) (3) (4) (5) EM Hard Currency EM Local (6) EM Blended Currency Dec-12 Mar-13 May-13 Aug-13 Oct-13 Jan-14 Apr-14 Jun-14 Sep-14 7 Source: EPFR
EM s Have Maintained Healthy Buffers to External Shocks $mn Reserve Accumulation of EM Countries* As of September 30, 2014 Emerging Markets vs. G7 Public Debt (% of GDP) IMF forecasts as of Apr 2014 Many EM countries today have strong liquidity buffers, freefloating currency regimes, and relatively low debt burdens. 8 Source: Haver Analytics. *EM Countries include all constituents based on the JP Morgan GBI-EM Global Diversified Index
EM Should not be Ignored Given its Rising Global Importance DM and EM Share of Global GDP (%) 1982 2019 (Estimated) 90% 80% DM EM 70% 60% 50% 40% 30% 20% 10% 1982 1986 1990 1994 1998 2002 2006 2010 2014(E) 2018 (E) 9 Source: International Monetary Fund, World Economic Outlook Update, April 2014.
Although Idiosyncratic Events have Driven Disparate Returns 10
Today s Absolute Valuations Are Fair Emerging Markets Hard Currency 30 September 2011 30 September 2014 Emerging Markets Corporate 30 September 2011 30 September 2014 6.5 JPM EMBI Glbl Div Average for period 7.5 JPM CEMBI Broad Div Average for period 6 7 6.5 Yield (%) 5.5 5 4.5 5.40% 5.31% Yield (%) 6 5.5 5 4.5 5.35% 5.27% 4 Sep 11 Mar 12 Sep 12 Mar 13 Sep 13 Mar 14 Sep 14 4 Sep 11 Mar 12 Sep 12 Mar 13 Sep 13 Mar 14 Sep 14 Emerging Markets Local Currency 30 September 2011 30 September 2014 7.5 Average for period JPM EM GBI Glbl Div Yield (%) 7 6.5 6 6.74% 6.27% 5.5 5 Sep 11 Mar 12 Sep 12 Mar 13 Sep 13 Mar 14 Sep 14 11 Source: JP Morgan Indices: EMBI Global Diversified, CEMBI Broad Diversified, GBI-EM Global Diversified
But Relative Value is Attractive Investment Grade Yields (%) as of September 30, 2014 Non Investment Grade Yields (%) as of September 30, 2014 EM Debt assets compare favorably to global fixed income asset classes in both an investment grade and high yield context Representative indices include Barclay s Capital Global Treasury, Barclay s Capital Global Securitized, Barclay s Capital Euro-Aggregate Corporate, Barclay s Capital U.S. Investment Grade Corporate, Barclay s Sterling Gilts Index, JP Morgan Emerging Markets Bond Index Global Diversified (Investment Grade and High Yield components), JP Morgan Corporate Emerging Market Bond Index Broad Diversified (Investment Grade and High Yield components), JP Morgan Global Bond Index Emerging Markets Global Diversified (Investment Grade and High Yield components), S&P LSTA Performing Loans index, Barclay s Capital High Yield index, Barclay s Capital Pan-European High Yield Sources: J.P. Morgan Chase & Co., Barclay s Capital, Standard & Poor s, Moody s 12 12
2H14 Returns Likely to be Driven by Carry versus Yield Compression 8 Average Coupon by Asset Class (%) as of September 30, 2014 7 6 5 4 3 2 1 0 Global HY EM Local EM Dollar Sovereign EM Corp U.S. IG Corp UK Swedish Sterling Krona Aggregate Aggregate Euro IG Corp Euro Aggregate U.S. Aggregate Global Aggregate U.S. Treasury J.P. Morgan indices: Emerging Markets Bond Index Global, Global High Yield, GBI-EM Global Diversified, CEMBI Broad Diversified; Barclays indices: U.S. Corporate Investment Grade, U.S. Aggregate Bond Index, Global Aggregate Bond Index, U.S. Treasury component of Barclays U.S. Agg; UK Sterling Aggregate, Swedish Krona Aggregate, Euro Corporate Investment Grade, Euro Aggregate Sources: Barclays, JP Morgan, S&P/LSTA 13
Investor Allocations Continue to Rise from a Low Base As at 31 Dec 2012 700 600 Dedicated EM Debt Investor Base** As of September 2014 Corporate External Debt External Debt Local Debt 9% 11% 12% 500 U.S. $, billions 400 300 6% 7% 57% 55% 51% 52% 200 67% 100 0 36% 38% 37% 36% 27% 2010 2011 2012 2013 Sep 2014 14 Sources: JP Morgan, Morningstar, Morgan Stanley
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