For professional use only Not for Public distribution Emerging Market Debt attractive yield with solid fundamentals November 2012 Kevin Daly, Senior Portfolio Manager EMD Aberdeen Asset Management
Table of contents EMD return characteristics EMD asset class comprises countries and companies that are fiscally sound EMD economies will be key drivers of global growth in the future EMD stands out in a lower for longer world The EMD universe EM companies getting in the act Summary Appendix 1
Risk & return data support the case for EMD 15 years benchmark risk and returns Benchmark annualised returns GBP (%) 12 11 10 Emerging Markets Debt 9 8 Emerging Markets Equity 7 UK Fixed Corporate Bond 6 5 4 UK Equities Global Equities 0 5 10 15 20 25 30 Risk/annualised standard deviations (%) * All figures were correct at the close of business on 31 Aug 12 Benchmarks Used: Emerging Markets Debt JPM EMBI Global Diversified Emerging Markets, Equity MSCI Emerging Markets, Global Equities MSCI World UK Equities FTSE AllShare UK Fixed Corporate Bond Merrill Lynch Sterling Non-Gilts 2
The perception of risk versus the reality Country A Country B Public Debt (% GDP) 106.6 44.2 Fiscal Deficit (% GDP) -8.1-2.4 GDP Growth (%) 2.1 3.6 10 Year Real Yield (%) - 0.2 0.6 US Mexico Source: IMF World Economic Outlook, Apr 12; Bloomberg, Sep 12 3
The biggest is not necessarily the best! Public debt (% GDP) Fiscal deficit (% GDP) 120 US Mexico 0 US Mexico 100-2 80-4 -6 60-8 40-10 20-12 0 2008 2009 2010 2011 2012E 2013F -14 2008 2009 2010 2011 2012E 2013F Source: Aberdeen Asset Management, Sep 12 4
EM economies have considerably lower debt levels... General Government Debt (% GDP) vs Government Balance (% GDP) Gross General Government Debt for 2012 (% of GDP) 160 150 140 130 120 110 100 90 80 70 60 50 40 30 20 10 0 Japan Japan's Govt. Debt is 236% Greece Jamaica Lebanon Italy Barbados Ireland Portugal USA Belgium UK France Canada Egypt Spain Germany Hungary Jordan Netherlands India Brazil Ivory Coast Developed countries Eurozone G10 Asia CEEMEA LatAm CroatiaSerbia Slovenia Poland Venezuela Malaysia El Salvador Norway Slovak Republic Switzerland Argentina Senegal Mexico Uruguay Lithuania ThailandPhilippines South Africa VietnamUkraine Latvia Belarus Turkey Sweden Georgia Romania Costa Rica Korea Colombia Panama Iraq Dominican Republic Qatar Namibia Australia Luxembourg Guatemala China Indonesia Peru Ecuador UAE Emerging countries Chile Russia Kazakhstan Saudi Arabia -11-10 -9-8 -7-6 -5-4 -3-2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 General Government Balance for 2012 (% of GDP) Source: IMF, World Economic Outlook Database, May 12 5
EM now accounts for more than 70% of global GDP growth China s share now at 50% %-pt contribution to global nominal GDP %oya growth 70 60 50 40 30 20 10 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012F 2013F Source: JP Morgan 6
... and are likely to be the main drivers of future growth 2010 2050f Japan 6% Other 9% Emerging Markets 40% North America 11% Japan 2% Other 9% Emerging Markets 69% North America 22% Europe 9% Europe 23% By 2050 Emerging Markets are forecast to represent 69% of world GDP versus 40% now With a growing, financially independent, aspirational middle class Source: Citi Mar 11; GDP measured in 2010 PPP USD 7
EM now accounts for 40% of global consumption % of global consumption 40 EM US 36 32 28 24 20 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Source: JP Morgan 8
EMD yields stand out in lower for longer world EM external, domestic and corporate indices are all investment grade Yield (%) EM Local Currency (BBB+) EM Corporates (BBB) EM Hard Currency (BBB-) US 10yr (AA+) Germany 10yr (AAA) 14 12 10 8 6 4 2 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 EM Local currency index: JPM GBI-EM GD, EM Hard currency index: JPM EMBI GD, EM Corporate index: JPM CEMBI BD Source: JP Morgan, S&P, Bloomberg, 17 Oct 12 9
Real yields remain elevated Country 10 year bond yield (%) Inflation y-o-y (%) Real yield (%) Credit rating (S&P) Brazil 9.5 5.3 4.2 A- Colombia 6.0 3.1 2.9 BBB+ South Africa 7.1 5.0 2.1 A Malaysia 3.4 1.4 2.0 A Indonesia 5.7 4.3 1.4 BB+ Russia 7.4 6.6 0.8 BBB+ Mexico 5.4 4.8 0.6 A- US 1.8 2.0-0.2 AA+ UK 1.9 2.2-0.3 AAA Germany 1.6 2.0-0.4 AAA Source: S&P, Bloomberg, 17 Oct 12 10
for investment grade credit quality S&P breakdown of EMBI Global Diversified Index S&P breakdown of GBI-EM Global Diversified Index B 16.5% NR 1.6% AA 3.2% A 9.0% BB 16.9% A 57.4% BB 25.2% BBB 44.4% BBB 25.8% External debt is 57% investment grade Average credit quality is BBB- Domestic debt is 83% investment grade Average credit quality is BBB+ Source: JP Morgan, 31 Jul 12 11
EM sovereign debt has shown steady improvement in credit quality % of EMBIG market capitalization by ratings bucket 100% NR B BB IG 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1993 1996 1999 2002 2005 2008 2011 Source: JP Morgan 12
The EMD universe has grown rapidly Total EMD market: USD 7.7trn Size of the EMD market by investment type Local Sovereign USD Sovereign USD Corporate 9,000 8,000 7,000 6,000 5,000 Local Sovereign $6,000 bn (78%) USD Corporate $1,023 bn (13%) USD Sovereign $549bn (9%) 4,000 3,000 2,000 1,000 0 2007 2008 2009 2010 2011 EMD local debt is more than three times the value of external debt Source: BIS, Bondradar, JP Morgan, Sep 12 13
EM local market issuance dwarfs hard currency issuance for sovereigns Local currency gross issuance (USD bn) 600 Gross Issuance issuance Net issuance Issuance (gross minus maturities) Local issuance as a % of total sovereign issuance (rhs) 95% 500 90% 85% 400 80% 300 75% 70% 200 65% 100 60% 55% - 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012YTD 50% Note: Data for local issuance includes countries in the GBI-EM Broad index as well as those under review for inclusion, along with Israel, which is in the GBI index. Source: Bond Radar, JP Morgan, official sources 14
Low sovereign issuance paves the way for corporates Total external issuance (USD bn) 160 EM Sovereign EM Quasi-sovereign EM Corporates 140 120 100 80 60 40 20 0 2006 2007 2008 2009 2010 2011 2012 2012F * Issuance multiple of corporate and quasi-sovereign over sovereign Source: JP Morgan, Sep 12 For illustrative purposes only 15
Which is rapidly developing into a discrete asset class Relative size of markets (USD bn) 5,000 Investment Grade High Yield 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 US HY US IG Euro HY Euro IG EM Sovs (HC)* EM Sovs (LC)* EM Corps (HC)* EM Corps (LC)* US HY: ML US High Yield Master II Index, US IG: ML US Corporate Master Index, Euro HY: ML Euro High Yield Index, Euro IG: ML EMU Financial Corporate Pfandbrief Index Source: BofA Merrill Lynch. * Source: ING (total debt outstanding), as at 31 Dec 11. For illustrative purposes only
With a growing, dedicated investor base Estimated value of assets managed against EM indices (USD bn) 250 Local debt (JPM GBI-EM) External debt (JPM EMBI) External corporate debt (JPM CEMBI) 200 150 100 50 0 2008 2009 2010 2011 2012 Source: JP Morgan, Dec 11. For illustrative purposes only 17
EM local pension fund assets have risen past $1.7trn, while EM insurance company assets approach $3trn Pension fund assets (USD bn) Insurance company assets (USD bn) 2000 1800 1600 1400 1200 Latin America EM Asia EMEA 3000 2500 2000 Latin America EM Asia EMEA 2.7 trn 1000 800 600 400 200 1500 1000 500 1.3 trn 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2005 2011 Source: Official sources and JP Morgan, Nov 12 18
This is a structural story EM fixed income flows will likely end the year at a new record US$85 billion USD bn 90 80 70 2008 2009 2010 2011 2012 77.2 80.0 60 50 40 46.8 43.3 30 20 10 0-10 -3.4 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: JP Morgan 19
But the same perceptions exist for companies Company A Company B Net interest margin (%) 2.6 5.5 Return on common equity (%) 11.0 20.5 Total capital ratio 1 (%) 14.9 15.1 Yield of representative 2016 senior bond 2 (%) 1.6 2.9 JP Morgan A2 rated US bank Bancomer A2 rated Mexican bank 1. Total capital/risk weighted assets 2. Mid yield to maturity Source: Company presentations and reporting, figures for Q1 2012. Securities selected for illustrative purposes only. 20
Yet, EM companies have consistently lower default rates 12 month rolling Speculative grade default rates Emerging Markets US Europe Global 2011 0.59 1.98 1.60 1.71 2010 1.25 3.29 1.01 2.82 2009 6.17 11.19 8.02 9.52 2008 2.20 4.13 2.63 3.56 2007 0.18 1.00 1.02 0.89 U.S. default rate includes issuers incorporated in U.S. tax havens (for example, Bermuda and Cayman Islands). Europe refers to Austria, Belgium, Bulgaria, Channel Islands, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Norway, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, Switzerland, and the U.K. Data through March 31, 2012. Subject to revision. Source: Standard & Poor's CreditPro, May 2012 21
but trades at wider spreads EM corporates have lower leverage in the same ratings buckets and wider spreads despite lower leverage EM Corporates US Corporates EM Corporates US Corporates A A BBB BBB BB BB B B 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 Net Leverage, x 0 25 50 75 100 125 150 175 200 225 250 275 300 325 Spread per Turn of Net Leverage, bps/x Source: BofA Merrill Lynch Global Research, Sep 12 22
EM countries have maintained current account surpluses for 15 consecutive years Current account balance (% of GDP) 8 total EM Europe ex Russia EM Europe Latin America Emerging Asia 6 4 2 0-2 -4-6 1992 1995 1998 2001 2004 2007 2010 2013 Source: JP Morgan
EM inflation has been well-contained and has trended lower after peaking in July last year CPI %oya 10 Developed markets Emerging markets 8 6 4 2 0-2 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: JP Morgan
Summary EMD markets are extremely attractive with better fundamentals and lower default rates Perceptions are often counter to this reality in both countries and companies This is a rapidly growing asset class which is predominantly investment grade Inflows are structural and should remain steady amid search for yield EMD offers attractive return opportunities 25
Appendix
Aberdeen: EMD Plus allocation history EMD Plus LC Sovereign HC Sovereign/Quasi HC Corporates FX exposure 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Source: TBC 27
Important information Investors should be aware that past performance is not a guide to future returns, the value of investments and the income from them can fall as well as rise and investors may get back less than the amount invested The views expressed in this presentation should not be construed as advice on how to construct a portfolio or whether to buy, retain or sell a particular investment. The information contained in the presentation is for exclusive use by professional customers/eligible counterparties (ECPs) and not the general public. The information is being given only to those persons who have received this document directly from Aberdeen Asset Management (AAM) and must not be acted or relied upon by persons receiving a copy of this document other than directly from AAM. No part of this document may be copied or duplicated in any form or by any means or redistributed without the written consent of AAM Issued by Aberdeen Asset Managers Limited which is authorised and regulated by the Financial Services Authority in the United Kingdom 28