Citywire Montreux – 9th ‐11th May 2012Emerging Market Corporate DebtAn asset class that has emerged
Contents• Emerging Market Corporate Debt – an asset class that has emerged       g g            p                         ...
EM Corporate Debt – An asset class that has emerged           Large and well diversified asset class           • The EM Co...
EM Corporate Debt – An asset class that has emergedLarge and well diversified asset class• The EM Corporate asset class en...
EM Corporate Debt – An asset class that has emerged Large and well diversified asset class • Approximately two thirds of E...
EM Corporate Debt – An asset class that has emerged       Exposure does not match increasing economic importance       • E...
EM Corporate Debt – An asset class that has emerged               EM dedicated investor base is small but growing         ...
EM Corporate Debt – An asset class that has emergedIssuer Selection is Key• The dispersion between the top 5 returns and t...
EM Corporate Debt – An asset class that has emergedHistoric Risk Reward is Attractive• Despite the September 2008 sell‐off...
EM Corporate Debt – An asset class that has emergedOffers spread pickup vs DM Corporates• EM corporate spreads (excluding ...
EM Corporate Debt – An asset class that has emerged                     EM Corporates spreads offer value over US Corporat...
EM Corporates – Investment Case                                  EM Corporates benefit from a strong liquidity position   ...
EM Corporate Debt – An asset class that has emerged                  Fundamentally, EM Corporates are well positioned     ...
Citywire em corp debt an asset class that has emerged
Citywire em corp debt an asset class that has emerged
Citywire em corp debt an asset class that has emerged
Citywire em corp debt an asset class that has emerged
Citywire em corp debt an asset class that has emerged
Citywire em corp debt an asset class that has emerged
Citywire em corp debt an asset class that has emerged
Citywire em corp debt an asset class that has emerged
Citywire em corp debt an asset class that has emerged
Citywire em corp debt an asset class that has emerged
Citywire em corp debt an asset class that has emerged
Citywire em corp debt an asset class that has emerged
Citywire em corp debt an asset class that has emerged
Citywire em corp debt an asset class that has emerged
Citywire em corp debt an asset class that has emerged
Citywire em corp debt an asset class that has emerged
Citywire em corp debt an asset class that has emerged
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Citywire em corp debt an asset class that has emerged

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Citywire em corp debt an asset class that has emerged

  1. 1. Citywire Montreux – 9th ‐11th May 2012Emerging Market Corporate DebtAn asset class that has emerged
  2. 2. Contents• Emerging Market Corporate Debt – an asset class that has emerged  g g p g• Emerging Market Corporate Debt at BlueBay 2
  3. 3. EM Corporate Debt – An asset class that has emerged Large and well diversified asset class • The EM Corporates universe is US$863bn(1) in size compared to US$608bn(2) for EM sovereign and US$325bn for European High Yield(3) • Of h US$863b Of the US$863bn EM Corporates Universe, US$580bn (67%) are rated Investment Grade C U i US$ 80b (6 %) dI G d • While still being a smaller universe, EM corporates as an asset class are now comparable to US HY (US$1.3tln), European IG (€1.3tln) and US IG (US$4.1tln)  EM Corporate debt is larger than EM sovereign and European HY(1)(2)(3) Estimated Corp Debt Stock (US$bn), to January 2012  1000 US$4100bn 900 800 700 Universe Size (US$bn) 600US$bn 500 400 300 200 US$1300bn 100 US$863bn 0 US$325bn 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 YTD-12 EM Sovereign Debt European High Yield EM C orporate Debt US IG US HY EM C orp Euro HY Data source: JP Morgan (1) EM Corporates universe, as of January 2012      (2) EM sovereign  universe as at 30 September 2011    Data source: JP Morgan 3 (3) European High Yield universe based on the market cap of ML HY bond index, as at January 2012
  4. 4. EM Corporate Debt – An asset class that has emergedLarge and well diversified asset class• The EM Corporate asset class encompasses over 60 countries providing opportunity to diversify and take advantage of different economic cycles • The asset class also offers sector diversification with banks being the largest issuersCountry Breakdown as at 10 January 2012* Sector Breakdown as at 10 January 2012* Ot her Utilities Co nsumer Saudi Arabia Thailand Transpo rt 8.06% 4.15% Poland 1.88% Turkey Colombia Diversified Hungary TM T 5.60% Argent ina 7.32% Peru Ukraine Czech Philippines pp Real Estate Israel 5.45% Sout h Af rica Supranat ion Malaysia P ulp & paper Indonesia 1.69% Qat ar Financial Chile 34.13% Singapore Venezuela India Kazakhst an Oil & gas China Hong Kong 19.67% UAE Mexico Industrial Korea 4.18% Russia M etals & mining Brazil Infrastructure 6.35% 0% 2% 4% 6% 8% 10% 12% 14% 1.52%Composition of Emerging Market Corporate bonds by issuer type Composition of Emerging Market Corporate bonds by rating Africa  Emerging  Latin  Rating Entity Total (US$mn) Total (US$mn)Issuing Entity Since 2002 & ME Asia Europe America Total High Yield Bank 44,431 Bank quasi‐sovereign 18,404Banks 30 105 94 121 350 Corporate 157,230Banks ‐ Govt guarantee 3 3 Corporate quasi‐sovereign 56,516 Supranational Bank 475 gBanks Quasi‐sovereign*** 35 77 70 40 222 Total 277,057Corporate 44 294 91 385 814 High Grade Bank 98,626 Bank quasi‐sovereign 97,817Corporate Quasi‐sovereign 62 111 56 86 315 Corporate 163,462Total number of Issues 171 587 314 632 1,704 Corporate quasi‐sovereign 214,287 Supranational Bank 11,915 Total 586,107 Total EM Corporate bond stock 863,164Data source:  Top charts – JP Morgan, Bloomberg, BlueBay Asset Management.     Bottom charts – JP Morgan as at 10 January 2012   *Based on US$863bn Universe      ***Includes Supranational Banks 4
  5. 5. EM Corporate Debt – An asset class that has emerged Large and well diversified asset class • Approximately two thirds of EM Corporates are rated Investment Grade, a number of which are of systemic importance to the sovereign.  Quasi sovereign credits account for one third of the asset class • New issuance remains strong in EM Corporates with the majority of issuance coming from IG corporates.  2011 issuance was US$202.5bn and  a further US$185bn is anticipated for the full year 2012 Rating Breakdown of EM Corporate Universe  Estimated EM Corporate Debt Stock (US$bn) to 10 January 2012 Q uasi-sovereign* I nvestment G rade H igh Y ield C C C and AAA US$116.0bn US$283.5bn US$179.0bn US$285.0bn US$863.2bn lower* 1.25% 100% 8.85% 8 85% AA 14.52% 5.55% 90% 20.60% 23.36% 24.47% B 31.72% 10.47% 80% 20.22% A 70% 26.05% 26 05% 12.27% 12 27% 30.36% 30 36% 60% 38.32% BB 37.93%13.44% 50% 40% 65.26% 30% 56.01% 56 01% 46.27% 20% 41.08% 37.60% BBB 10% 34.40% 0% Africa & Asia Emerging Latin Total Middle East Europe America Data source: JP Morgan, BlueBay Asset Management, as of  10 January 2012 Data source: JP Morgan   *Including supranationals and government guaranteed 5 *Including not rated
  6. 6. EM Corporate Debt – An asset class that has emerged Exposure does not match increasing economic importance • EM is 37% of GDP but just 13% of MSCI AC World Index and 3% of Barclays Capital Global Aggregate Index EM / DM breakdown of indices EM Corporates EBITDA growth vs debt growth120% 80% Developed Markets EM: China EM: Brazil, Russia, India EM: Other EBITDA Debt100% 3% 7% 19% 4% 60% 2%80% 9% % growth 9%60% 40% 97% 87%40% 63% 20%20% 0% 0% Share of 2010 Sh f Share of MSCI Sh f Share of Barcap Sh fB Q4 09 Q1 10 Q2 10 Q3 10 Q1 11 Q4 10 World GDP AC World Index Global Agg Index* • Emerging Markets currently contribute close to 40% of global GDP and yet share only 15% of global market capitalisation and 3% of global  g g y g y y g p g credit. We expect both numbers to increase significantly as EM growth outperformance occurs • In fixed income, we believe the strong internal growth story in EM creates the need for capital to fund this growth and leads to significantly  increased EM corporate issuance and its growing share of fixed income issuance globally Data source: MSCI, BarCap, FactSet, World Federation of Exchanges, Goldman Sachs Global ECS Research estimates, as at October 2011 6 *EM also accounts for approx. 6% of US$ denominated Merrill Lynch HY index
  7. 7. EM Corporate Debt – An asset class that has emerged EM dedicated investor base is small but growing • The launch of JP Morgan CEMBI Diversified index in November 2007 opened the door for a dedicated EM Corporate investor base. Despite fast  g p p p AUM growth during 2011, dedicated EM corporate investors only account for US$29.6bn versus US$863bn asset class. Majority of the mandates are run for mixed rating products as well as EM IG and EM HY dedicated mandates • We expect to see further growth in the dedicated investor base for EM Corporates Total AUM managed against EM indices, to 14 December 2011 300 Local Market Debt External Debt 231.4 228.5 226.5 226.4 250 Corporate External Debt 206.6 6 2 205.4 4 2 204.2 2 197.2 192.0 189.1 187.3 181.2 178.8 178.2 174.1 200 162.7 158.9 149.8 146.5 33.3 30.2AUM (US$bn) 5.0 121.3 .3 150 13 125 119. 13 111.4 79.2 79.2 79.2 79.2 100 62.3 62.3 55.1 .9 .9 29.6 6 5 29.5 35. 35. 3 28.3 26.7 24.8 50 21.9 21.0 20.9 20.8 17.2 13.9 13.9 8.1 8.1 7.2 6.7 0 y-11 Ma r-11 n-08 n-09 n-10 ct-10 c-10 c-11 n-08 p-10 n-11 p-11 ul-07 ul-09 Apr-10 ul-10 Apr-11 ul-11 Jan Jan Jan Jun Jun Sep Sep Dec Dec May Ju Ju Ju Ju Oc Data source: JP Morgan 7
  8. 8. EM Corporate Debt – An asset class that has emergedIssuer Selection is Key• The dispersion between the top 5 returns and the bottom 5 returns within the index has been increasing• Thi d This demonstrates the need for bottom up credit research to identify the best credit specific opportunities h df b di h id if h b di ifi ii Return Dispersion in the JP Morgan CEMBI Div index 150 median (div) ( ) 100 50 turn (%) Total ret - -50 -100 2003 2004 2005 2006 2007 2008 2009 2010 2011Data source: BlueBay Asset Management 8
  9. 9. EM Corporate Debt – An asset class that has emergedHistoric Risk Reward is Attractive• Despite the September 2008 sell‐off, the historical performance of EM Corporates has been strong, generating a high return per unit of risk• As the EM Corporates asset class develops we are seeing a trend towards lower levels of volatility as evidenced by the 5 year vs 2 year risk As the EM Corporates asset class develops we are seeing a trend towards lower levels of volatility, as evidenced by the 5 year vs 2 year risk  reward profile of the asset class2 year period: 31 March 2010 to 31 March 2012 ML EUR  JULI  IBOXX EUR  GBI‐EM  CEMBI Div CEMBI Div EMBIG Div EMBIG Div S&P 500 S&P 500 MSCI EM Equity MSCI EM Equity High Yield (US High Grade) IG Corps Glob Div UnhedgedCorrelation to CEMBI Div 1.00  0.75  0.87  0.41  0.34  0.59  0.66  0.63 Annualised return 8.6% 7.8% 9.8% 8.9% 9.8% 2.4% 4.5% 7.9%Historical volatilityHi i l l ili 5.8% 5 8% 8.7% 8 7% 6.2% 6 2% 4.8% 4 8% 19.0% 19 0% 23.9% 23 9% 3.6% 3 6% 10.3% 10 3%Return per unit of risk 1.49  0.89  1.59  1.85  0.51  0.10  1.27  0.77 5 year period: 31 March 2007 to 31 March 2012 y p GBI‐EM  ML EUR  JULI  IBOXX EUR  CEMBI Div EMBIG Div S&P 500 MSCI EM Equity Glob Div High Yield (US High Grade) IG Corps UnhedgedCorrelation to CEMBI Div 1.00  0.74  0.86  0.51  0.41  0.59  0.55  0.61 Annualised returnA li d 8.1% 8 1% 8.4% 8 4% 8.2% 8 2% 8.5% 8 5% ‐0.2% 0 2% 2.3% 2 3% 4.4% 4 4% 8.9% 8 9%Historical volatility 9.5% 11.9% 11.2% 6.2% 23.4% 30.4% 4.2% 11.5%Return per unit of risk 0.85  0.71  0.73  1.37  ‐ 0.01  0.08  1.06  0.77 Data source: Bloomberg, JP Morgan, Morgan Stanley, UBS, and BlueBay Asset Management  9
  10. 10. EM Corporate Debt – An asset class that has emergedOffers spread pickup vs DM Corporates• EM corporate spreads (excluding financials) are materially higher than similar rated corporates in developed markets, offering potential for  spread pickupInvestment Grade, as at 04 April 2012 High Yield, as at 04 April 2012 Spread  Spread pick up  Spread  Spread pick up  Asset Class Asset Class Rating Asset Class Asset Class Rating (bps) in EM over DM (bps) in EM over DM DM CORPS ex fin AAA 50 DM CORPS ex fin BB 405 EM CORPS ex fin AAA 116 2.32  EM CORPS ex fin BB 567 1.40  DM CORPS ex fin AA 87 DM CORPS ex fin B 607 EM CORPS ex fin AA 203 2.33  DM CORPS ex fin A 120 EM CORPS ex fin B 972 1.60  EM CORPS ex fin A 197 1.64  DM CORPS ex fin CCC 943 DM CORPS ex fin BBB 216 EM CORPS ex fin BBB 287 1.33  EM CORPS ex fin CCC 1084 1.15 Data source: Merrill Lynch 10
  11. 11. EM Corporate Debt – An asset class that has emerged EM Corporates spreads offer value over US Corporates The EM corporates asset class offers spread pickup over similar rated corporates in the US, in particular: • EM High Grade spread pickup is greatest in Peru, India, Singapore and Brazil • EM HY spread pickup is largest in PDVSA, China, Ukraine, Kazakhstan and India EM HG USD CORP  Ratings Adjusted Bench Spread Basis to US Corporates EM HG USD CORP ‐ Ratings‐Adjusted Bench Spread Basis to US Corporates EM HY USD CORP  Ratings Adjusted Bench Spread Basis to US Corporates EM HY USD CORP ‐ Ratings‐Adjusted Bench Spread Basis to US Corporates 200 800 180 700 160 600 140 0 500Spread (bps) Spread (bps) 120 400 300 100 200 80 S 100 60 0 40 -100 20 -200 200 PDVSA Philippines HY Ukraine HY Brazil HY Colombia HY Kazakhstan HY Argentina HY E. Europe HY LATAM HY Singapore HY Peru HY China HY ASIA HY Indonesia HY Africa HY CA&Carib HY Mexico HY Russia HY India HY M. East HY EMEA HY ALL EM HY 0 Korea HG CAF Thailand HG zakhstan HG Brazil HG Colombia HG E. Europe HG Malaysia HG Peru HG Singapore HG LATAM HG China HG ASIA HG Chile HG Africa HG A&Carib HG Mexico HG Russia HG India HG M. East HG EMEA HG ALL EM HG CA M K T . Kaz Data source: Credit Suisse as at 31 January 2012 11
  12. 12. EM Corporates – Investment Case EM Corporates benefit from a strong liquidity position • EM Corporates have close to 3 times the cash to total debt when compared to 5 years ago • They also have ample cash to cover short term liabilities with 1.7 times cash to short term debt US & EM IG. Cash as % of Total Debt US & EM HY. Cash as % of Total Debt 40 35 US IG corporates US HY Corporates EM IG Corporates EM HY Corporates 35 30 Cash as a % of Tota l DebtCash as a % of Tota l Debt 29 30 25 24 25 20 20 20 15 13 C 15C 10 10 5 5 0 0 Mar 06 Mar 07 Mar 08 Mar 09 Mar 10 Mar 11 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Sep 06 Sep 07 Sep 08 Sep 09 Sep 10 Sep 11 Jun 06 Jun 07 Jun 08 Jun 09 Jun 10 Jun 11 Mar 06 Mar 07 Mar 08 Mar 09 Mar 10 Mar 11 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Sep 06 Sep 07 Sep 08 Sep 09 Sep 10 Sep 11 Jun 06 Jun 07 Jun 08 Jun 09 Jun 10 Jun 11 Data source: Bank of America Merrill Lynch, as at September 2011 12
  13. 13. EM Corporate Debt – An asset class that has emerged Fundamentally, EM Corporates are well positioned • Entering the economic downturn, EM Corporates had lower leverage than High Yield and High Grade credits in Developed Markets • The re‐rating process is underway with the upgrades to downgrades ratio reversing sharply since the start of the last year Leverage In EM And Developed Markets, as at 31 Jan 2012  US Upgrades/Downgrades. Total EM, as at 30 December 2011 (Net Debt/EBITDA)  250 7.0 Upgrades 5.0x Downgrades Upgrades to Downgrades ratio 6.0 200 4.0x US 3.6x 5.0 des/downgrades Ratio of up/dow 3.0x 150Le verage (x) EM 4.0 2.5x wngrades Upgrad 2.0x US 3.0 1.6x 100 EM 2.0 1.0x 1.0x 50 1.0 0.0x IG Net Leverage HY Net Leverage 0 0.0 Q07 Q07 Q07 Q07 Q08 Q08 Q08 Q08 Q09 Q09 Q09 Q09 Q10 Q10 Q10 Q10 Q11 Q11 Q11 Q11 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q Data source:  Merrill Lynch Data source:  JPMorgan 13

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