Fixed Income Opportunities in Emerging Markets Hemant Baijal Portfolio Manager September 7, 2017 2017 OppenheimerFunds, Inc. All rights reserved., 225 Liberty Street, New York, NY 10281-10081
Local vs. Hard Currency : Distinct Asset Classes Traditionally the EM opportunity was in USD denominated debt (hard currency) US Duration + Credit Spread Since the turn of the century EM Local debt has grown exponentially due to economic development and improved fiscal and monetary policies Local Duration + Currency Subject to change. There can be no assurance that any inv estment process or strategy will achiev e its inv estment objectiv e.
Local vs. Hard Currency : Different Return Drivers EM Hard (Government and Corporate) EM Local Government Return Drivers Risk Factors Associated Characteristics US duration Credit Carry and spread change debt ratio, industry trends Correlation to US HY Credit deterioration / governance Long duration profile Potential asset/liability mismatch Most inclusive of Frontier Markets; Diverse opportunity set Least volatile type of EM debt Current spreads are tight vs history Local duration (carry) and Term Premia Local interest rate movements Fiscal and Monetary policies Local currency carry and directionality Currency volatility Local Inflation, monetary policy, fiscal policy Capital controls Least credit risk within EM debt Most liquid amongst EM debt assets within a rapidly growing market Amongst the highest-yielding assets in EM debt Subject to change. There can be no assurance that any inv estment process or strategy will achiev e its inv estment objectiv e.
Value of Active Management in EM Debt JPMorgan GBI-EM Global Diversified Index Total Return (%) Carry (%) Capital Gains Local Duration (%) FX (%) 2006 15.2 6.4 2.0 6.2 2007 18.1 6.7 0.0 10.7 2008 (5.2) 7.3 3.3 (14.5) 2009 22.0 7.2 2.9 10.6 2010 15.7 6.9 4.3 3.8 2011 (1.8) 6.5 1.8 (9.4) 2012 16.8 6.4 7.0 2.7 2013 (9.0) 6.3 (6.3) (8.7) 2014 (5.7) 6.4 1.7 (12.8) 2015 (14.9) 6.4 (3.0) (17.6) 2016 9.9 6.2 3.0 0.5 Average 5.6 6.6 1.5 (2.6) Source: OFI Global, Bloomberg and JPMorgan, as of 12/31/16
Real Yields are Positive as Inflation has Come Down resulting in favorable monetary policy cycle Consumer Price Index by Country (YoY % Change) Average (2012-2017) Current Average Real Yields of EM 10-Year Bonds 4 9 8 7 6 5 4 3 2 1 0 India China Russia Brazil Indonesia 3 2 1 0 2012 2013 2014 2015 2016 2017 Source: Bloomberg, 2/28/17. Countries included in the average real yield calculations are India, Russia, China, Mexico, Indonesia, Turkey and Brazil. Real Yields are the nominal yield of a country s sovereign bond minus the year-over-year change in their respective consumer price index.
EM Local Provides the Best Opportunity Base Case: world growth to remain above recent trend, led by Europe, Japan and turnaround in various EM countries Risks: material widening of the US budget deficit and over tightening of monetary policy in China Rates FX Credit Low: in Developed Markets (likely going higher High: in Emerging Markets (likely going lower) USD has most likely peaked EM currencies are cheap Expensive, particularly in the US Selective opportunities in Emerging Markets Subject to change. There can be no assurance that any inv estment process or strategy will achiev e its inv estment objectiv e.
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