Reasons why: Emerging market (EM) corporate bonds February 2017 Low yield in developed market bonds can pose a significant challenge for fixed-income investors. This has forced many investors to move down the credit curve and seek out riskier opportunities such as U.S. high yield in the search of yield. Are there any other alternatives that can offer high income with relatively low risk and volatility? We think emerging-market (EM) corporate bonds may provide one such opportunity - strong risk-adjusted returns with no foreign exchange risk, high creditworthiness, low duration and low correlations with U.S. Treasuries. Let s look more into the benefits of this asset class.
1 It s a large diversified asset class Emerging-market corporates is a mainstream asset class at over $1.8 trillion, roughly 20% larger than U.S. high yield, as of ember 31, 2016. With size comes diversification,* and there are over 700 issuers to invest in. Relative size of markets ($bn) 2,000 1,500 1,000 500 0 EM Corporates US HY US Leveraged Loans EM HC Sovereigns ABS CMBS Euro HY Source: JP Morgan, ember 31, 2016. For illustrative purposes only. Note: HY (high yield); HC (hard currency); ABS (asset-backed securities); CMBS (commercial mortgage-backed securities). EM=Emerging Markets; ABS=Asset Backed Securities; CMBS=Corporate Mortgage Backed Securities; bn= Billions Benchmark breakdown by region (%) Asia 37.7% EMEA 32.5% LATAM 29.8% Source: JP Morgan, ember 31, 2016. For illustrative purposes only. EMEA: Europe, Middle East and Africa. LATAM= Latin America Benchmark breakdown by sector (%) Financial 31.7% Oil & Gas 16.5% TMT.8% Utilities 8.9% Consumer 7.1% Industrial 5.5% Real Estate 5.3% Metals & Mining 5.3% Diversified 2.7% Infrastructure 1.6% Pulp & Paper 0.9% Transport 0.6% Source: JPM Corporate EMBI (Emerging Market Bond Index) Broad Diversified, ember 31, 2016. For illustrative purposes only. Figures may appear not to add due to rounding. Indices are unmanaged and have been provided for comparison purposes only. You cannot invest directly in an index. Sector allocations are subject to change. TMT= Technology, Media and Telecom 2 Strong credit fundamentals Average credit metrics of EM corporates are stronger than their developed market counterparts. Leverage is consistently lower than U.S. companies. Net leverage (x) 4.0 3.5 Leverage (x) A 3.0 2.5 2.0 1.5 1.0 2008 2009 2010 2011 EM US 2012 20 20 20 2016 Source: Bank of America/Merrill Lynch (BAML), June 30, 2016. For illustrative purposes only. BBB BB B 0 1 2 3 4 5 6 7 8 EM US Source: BAML, June 30, 2016. For illustrative purposes only. Standard & Poor s credit ratings express the agency s opinion about the ability and willingness of an issuer, such as a corporation or state or city government, to meet its financial obligations in full and on time. Typically, ratings are expressed as letter grades that range, for example, from AAA to D to communicate the agency s opinion of relative level of credit risk. Ratings from AA to CCC may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories. * Diversification does not ensure a profit or protect against a loss in a declining market. Reasons why series Page 02 of 06
2017F 3 Low default rates Despite the perception of higher risk of EM, long-term default rates in the EM corporates universe are lower than developed markets. Default rates (%) 12 10 8 6 4 2 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20 20 20 2016 EM EM average US HY US HY average Source: JP Morgan, ember 31, 2016. For illustrative purposes only. Note: default rates are dollar-weighted; F (forecast). Forecasts are offered as opinion and are not reflective of potential performance, are not guaranteed and actual events or results may differ materially. 4 Defensive characteristics Over the last years, there have been only two years where the EM corporate index has had negative returns: the global financial crisis in 2008 and the taper tantrum in 20. The defensive characteristics of this asset class can be seen under two different sources of stress: What happens when rates sell off? The 20 taper tantrum What happens when commodities sell off? The 20 drop in commodity prices 10 year U.S. Treasury yield (%) 3.5 3.0 2.5 2.0 1.5 12 Mar Jun Sep EM Corporates -0.60% Duration: 5.10 years US Aggregate -1.53% Duration: 6.75 years EM HC Sovereign -5.25% Duration: 6.73 years Brent Crude ($/barrel) 120 90 60 30 Jun Sep Mar Jun Sep EM Corporates Oil & Gas -3.% US HY Oil & Gas -23.58% EM oil & gas companies are predominantly large, integrated and investment grade. Source: Bloomberg, JP Morgan, Barclays, ember 31, 20. For illustrative purposes only. Indices used: EM Corporate = JP Morgan CEMBI Broad Diversified; US Aggregate = Barclays US Aggregate Corporate; EM HC Sovereign = JP Morgan EMBI Global Diversified. Source: Bloomberg, JP Morgan, BAML, ember 31, 20. For illustrative purposes only. =Indices used: EM Corporate = JP Morgan CEMBI Broad Diversified; US High Yield = BAML US High Yield. Reasons why series Page 03 of 06
5 Robust long-term performance Despite defensive characteristics of short duration and low volatility, EM corporates has been a strong-performing asset class over the last 17 years. Annualised asset class returns 1999-2016 (%) EM Corporates HY EM Equity US HY EM Corporates IG EM HC Sovereign Euro HY TIPs US IG CMBS Preferreds US Loans Municipals 10yr Treasury Euro IG US Equity ABS 0 2 4 6 8 10 Source: BAML, ember 31, 2016. For illustrative purposes only. PAST PERFORMANCE IS NOT A GUIDE TO FUTURE RESULTS. Note: IG (investment grade); TIPs (treasury inflation protected securities) Aberdeen team 32 dedicated EM debt investment professionals Over 50 country visits every year Over 300 companies actively-covered Over 500 company meetings every year ESG analysis on all companies Aberdeen emerging-market debt team: on-the-ground resources around the globe We have been investing in emerging-market corporate debt since 2004, and we have an established, a wellresourced, stable team with professionals located across emerging markets. London Budapest Singapore Jakarta Hong Kong Bangkok Kuala Lumpur São Paulo Sydney Reasons why series Page 04 of 06
Research trips We always meet the management of the companies we invest in and keep in regular contact. We undertake on-the-ground proprietary research, sometimes including site visits to operating facilities, because we believe it helps to get a better idea of the drivers of the business, understand their corporate culture and assess the underlying creditworthiness of the company. Recent research trips include the below destinations. Baku, Azerbaijan Caracas, Venezuela Shenzhen, China Cairo, Egypt Buenos Aires, Argentina Moscow, Russia Colombo, Sri Lanka Mexico City, Mexico Addis Ababa, Ethiopia Warsaw, Poland Delhi, India Rio de Janeiro, Brazil Cape Town, South Africa Contact us To learn more about how our strategies can potentially benefit your or your clients portfolios, contact your Aberdeen representative today. U.S. Institutional Business Development 2 405 5700 aberdeen-asset.us/institutionalinvestor Canadian Institutional Business Development 416 777 5570 aberdeen-asset.ca Reasons why series Page 05 of 06
IMPORTANT INFORMATION PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RESULTS Fixed income securities are subject to certain risks including, but not limited to: interest rate (changes in interest rates may cause a decline in the market value of an investment), credit (changes in the financial condition of the issuer, borrower, counterparty, or underlying collateral), prepayment (debt issuers may repay or refinance their loans or obligations earlier than anticipated), and extension (principal repayments may not occur as quickly as anticipated, causing the expected maturity of a security to increase). Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks may be enhanced in emerging markets countries. Asset-backed and mortgage backed securities are subject to additional risks, such as prepayment and extension risks. Derivatives entail risks relating to liquidity, leverage and credit that may reduce returns and increase volatility. The above is for informational purposes only and should not be considered as an offer, or solicitation, to deal in any of the investments mentioned herein. Aberdeen Asset Management (AAM) does not warrant the accuracy, adequacy or completeness of the information and materials contained in this document and expressly disclaims liability for errors or omissions in such information and materials. Some of the information in this document may contain projections or other forward looking statements regarding future events or future financial performance of countries, markets or companies. These statements are only predictions and actual events or results may differ materially. The reader must make his/her own assessment of the relevance, accuracy and adequacy of the information contained in this document, and make such independent investigations, as he/she may consider necessary or appropriate for the purpose of such assessment. Any opinion or estimate contained in this document is made on a general basis and is not to be relied on by the reader as advice. Neither AAM nor any of its agents have given any consideration to nor have they made any investigation of the investment objectives, financial situation or particular need of the reader, any specific person or group of persons. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of the reader, any person or group of persons acting on any information, opinion or estimate contained in this document. AAM reserves the right to make changes and corrections to its opinions expressed in this document at any time, without notice. In the United States, Aberdeen Asset Management (AAM) is the marketing name for the following affiliated, registered investment advisers: Aberdeen Asset Management Inc., Aberdeen Asset Managers Ltd, Aberdeen Asset Management Ltd, Aberdeen Asset Management Asia Ltd and Aberdeen Capital Management, LLC. Excluding Aberdeen Capital Management LLC, each of these advisers are wholly owned by Aberdeen Asset Management PLC. Aberdeen Capital Management LLC is a wholly-owned subsidiary of Aberdeen Asset Management Inc. Aberdeen is a U.S. registered service mark of Aberdeen Asset Management PLC. Aberdeen Asset Management ( AAM ) is the marketing name in Canada for the following affiliated entities: Aberdeen Asset Management Inc., Aberdeen Fund Distributors, LLC, Aberdeen Asset Management Canada Limited and Aberdeen Capital Management, LLC. Aberdeen Asset Management Inc. is registered as a Portfolio Manager in the Canadian provinces of Ontario, New Brunswick, and Nova Scotia and as an Investment Fund Manager in the provinces of Ontario, Quebec, and Newfoundland and Labrador. Aberdeen Asset Management Canada Limited is registered as a Portfolio Manager in the province of Ontario. Aberdeen Fund Distributors, LLC, operates as an Exempt Market Dealer in all provinces and territories of Canada. Aberdeen Fund Distributors, LLC, Aberdeen Asset Management Canada Limited and Aberdeen Capital Management, LLC, are wholly owned subsidiaries of Aberdeen Asset Management Inc. Aberdeen Asset Management Inc. is wholly owned by Aberdeen Asset Management PLC. Ref: 23211-270217-1 025249-0217-PHL EM SA Reasons why series Page 06 of 06