M&G Emerging Markets Bond Fund Claudia Calich, Fund Manager November 2015
Agenda Macro update & government bonds Emerging market corporate bonds Fund positioning
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
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
Index Index A tale of two EMs: adjusting to lower growth Manufacturing PMIs EM vs developed 60 55 Manufacturing PMIs EM countries 58 56 50 45 40 35 30 54 52 50 48 46 44 PMI differential (rhs) Emerging economies (lhs) Developed 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, 31 October 2015
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 Mexico Colombia Ecuador Peru Venezuela Brazil Morocco Algeria Nigeria Libya Jordan Egypt Iraq Iran Kuwait India Thailand Sri Lanka China Indonesia S. Korea 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
Exports to China Countries most exposed to slowdown in China % of country s total exports Source: CIA World Factbook, February 2015
% Rising US rates which countries win or lose? US interest rates forward curve 2.0 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 On a country level, winners and losers from an expected FED hike Winners Mexico Central America (others) Eastern Europe Losers Brazil Turkey South Africa 0.0 3-month EUR/USD futures Source: M&G, Bloomberg, 19 October 2015. Curve shown is Eurodollar 3M futures curve.
Yield Since the talk of tapering, EM assets have already been absorbing US rate tightening 3.4% 3.1% 0.9% 0.8% 0.7% 2.8% 0.6% 2.5% 2.2% 1.9% 0.5% 0.4% 0.3% 0.2% Yield 1.6% 0.1% 1.3% 0.0% UST 10-yr UST 2-yr (RHS) Source: M&G, Bloomberg, 16 October 2015
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 600 550 0-5 -10 500 450 400 350-15 -20-25 Worst spot returns 300 250 200 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 2015.
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% 5.0% 2.0% 1.5% -9.5% 6.7% 15% 10% 5% 0% -5% -10% Honduras remittances are 17% of GDP* 11.3% 6.0% 6.0% 1.9% 0.8% -5.5% Source: Central banks of Dominican Republic, Honduras, Guatemala, El Salvador; World Bank; December 2014; remittances as % of GDP from World Bank December 2013
US$ billions US$ billions EM fixed income fund flows Annual cumulative bond fund flows USD $ billions 120 100 New issuance: external sovereign and corporate debt 180 160 80 140 120 60 100 40 80 20 60 0 40 20-20 0 2010 2011 2012 2013 2014 2015 Sovereign Corporate 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
Agenda Macro update & government bonds Emerging markets corporate bonds Fund positioning
Diversification benefits Opportunities across diverse geographies and sectors EM external corporate debt by geography EM external corporate debt by sector EM Europe 12% Middle East 16% Africa 6% Latin America 28% Asia 38% 40% 35% 30% 25% 20% 15% 10% 5% 0% Source: Bloomberg, JPM CEMBI Broad Diversified Index, 21 August 2015.
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 1,000 800 600 400 200 0 Emerging markets United States Europe Source: Bloomberg, 19 October 2015
Historic default rates 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% forecast 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)
Agenda Macro update & government bonds Emerging markets corporate bonds Fund positioning
Asset allocation across all available EM opportunities M&G Emerging Markets Bond Fund EM corporate debt local currency Fund 4.0% Neutral position EM corporate debt hard currency 35.4% EM govt debt hard currency EM corporate debt hard currency 33% EM govt debt hard currency 33% 47.3% EM govt debt local currency 33% 8.1% EM govt debt local currency Source: M&G, 31 October 2015. 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
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, 31 October 2015
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 Sri Lanka 3.38% 0.58% 0.50% Brazil 3.81% 6.04% -0.52% Ivory Coast 1.82% 0.33% 0.37% South Africa 1.30% 4.97% -0.37% Armenia 1.65% 0.09% 0.36% Indonesia 2.54% 5.03% -0.14% Dominican Republic 1.35% 0.74% 0.35% Colombia 2.70% 4.44% -0.07% Pakistan 1.47% 0.27% 0.31% Croatia 1.34% 0.87% -0.04% Total risk is calculated via an internal algorithm considering FX risk, duration risk, credit risk and country bonds Source: M&G as of 31 October 2015 (we calculate all the risk drivers ratings, currency, duration, country of risk to generate an aggregate ranking)
Currency exposure M&G Emerging Markets Bond Fund 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% -10% Fund Neutral position -2.5% -2.6% -1.8% 3.0% 3.3% 2.2% 1.8% 1.6% 1.5% 1.1% 0.8% Source: M&G, 31 October 2015
Total return (01/12/2013 = 100) Performance in dollars M&G Emerging Markets Bond Fund 115 110 105 100 95 90 M&G Emerging Markets Bond Fund Morningstar Global Emerging Markets Bond sector average Source: Morningstar, Inc., Pan European database, 31 October 2015, USD A share class, gross income reinvested, price to price
Total return (01/12/2013 = 100) Performance in sterling M&G Emerging Markets Bond Fund 120 115 110 105 100 95 90 M&G Emerging Markets Bond Fund IA Global Emerging Markets Bond sector average Source: Morningstar, Inc., UK database, 31 October 2015, Sterling X share class, net income reinvested, price to price
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