Havesting value emd citywire wealth manager conference - march 2013


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Havesting value emd citywire wealth manager conference - march 2013

  1. 1. Harvesting Value in th Multiple Segments g he p g of Emerging Market Debt Arif T. Joshi, A if T Jo hi CFA Portfolio Manager, Managing Director ForFor Professional Investors Only Professional Investors Only l
  2. 2. Global Market CapitalisationEmerging Market Debt is a Significant a Growing Segment of the Market and Total Emerging Market Outstanding Debt = $14.8T g g g (17% of Global Debt M Market Capitalization) Local Debt Markets = $9.7T External Debt Markets = $5.1T Sovereign/ Corporate Quasi-sovereign 2.2 Bonds 0.7 Corporate Loans 1.7 Sovereign Loans (Lateral) Sovereign 0.8 5.1 Quasi- sovereign Corporate Bonds Sovereign Loans 2.5 0.8 (Other) 1.2All data as of 31 December 2011Data does not include debentures, mortgages, credit cards and other household debt.Source: ING, BIS, Lazard For Professional Investors Only l 2 Lazard Asset Management
  3. 3. Evolving UniverseIndices d not CI di do Capture F ll O ortunity S Full Oppo i Set Hard Currency Universe (70+ Countries)* Countries) Local Market Universe (45+ Countries)* Countries) Latin America Asia Eastern Europe Africa/M.E. Latin America Asia Eastern Europe Africa/M.E.  Argentina  China  Albania  Algeria  Argentina  China  Belarus  Angola  Aruba  Fiji  Azerbaijan  Angola  Brazil  India  Czech Republic  Botswana  Bahamas  India  Belarus  Bahrain  Chile  Indonesia  Georgia  Egypt  B b d Barbados  I d Indonesiai  B Bosnia i  Côt d’I i Côte d’Ivoire  C l bi Colombia  H Hong KKong  H Hungary  Gh Ghana  Belize  Hong Kong  Bulgaria  Congo  Costa Rica  Malaysia  Kazakhstan  Kenya  Bolivia  Malaysia  Croatia  Egypt  Dominican Republic  Mongolia  Poland  Israel  Brazil  Mongolia  Czech Republic  Gabon  Mexico  Pakistan  Romania  Malawi  Cayman Islands  Pakistan  Georgia  Ghana  Peru  Philippines  Russia  Mauritius  Chile  Philippines  Hungary  Iraq  Uruguay  Singapore  Serbia  Namibia  Colombia C l bi  Seychelles S h ll  Kazakhstan K kh t  Israel I l  South Korea S th K  Turkey T k  Nigeria Ni i  Costa Rica  South Korea  Latvia  Jordan  Sri Lanka  Ukraine  South Africa  Dominican  Sri Lanka  Lithuania  Kuwait  Thailand  Tanzania Republic  Thailand  Macedonia  Lebanon  Vietnam  Uganda  Ecuador  Vietnam  Poland  Morocco  U.A.E.  El Salvador  Romania  Namibia  Zambia  G Grenadad  R i Russia  Ni i Nigeria  Guatemala  Serbia  Oman  Jamaica  Turkey  Qatar  Mexico  Ukraine  Senegal  Panama  South Africa  Peru  Tunisia  T i id d Trinidad  UAE U.A.E.  Uruguay  Zambia  Venezuela Corporates, Inflation Linked Bonds, and ma countries are not represented in indices anyAs of 31 December 2012* Red highlighted countries represent those in the JPM EMBI Global Diversified Index (55 countries) for Hard Cur rrency and JPM GBI-EM Global Diversified Index (15 countries) forLocal MarketsSource: J.P. Morgan For Professional Investors Only l 3 Lazard Asset Management
  4. 4. Defining Hard Currency & L cal CD fi i H d C Loc l Currency I di Indices Hard Currency Local Currency Denomination USD EM currencies Duration 7.7 years 4.4 years Yield (%) 4.5 6.1 # of countries 55 15 Average Rating A R ti BBB- BBB BBB+ % Sovereign 77.7 100 % Quasi-Sovereign g 22.3 0 % Corporate 0 0 Annualized return* (%) 11.0 12.3 Annualized standard deviation* (%) 8.9 11.9 Worst monthly loss* (%) -16.0 -14.1 Sharpe Ratio* 1.0 0.9Data as of 31 December 2012Hard Currency = JPM EMBI Global Diversified; Local Currency = JPM GBI-EM Global Diversified.* The return and risk characteristics presented for Hard Currency and Local Currency represent the period betwe January 2003 to September 2010. eenShown for illustrative purposes only, not a product managed by Lazard.Past performance is not a reliable indicator of future results.Source: Lazard, JPMorgan For Professional Investors Only l 4 Lazard Asset Management
  5. 5. Fiscal Position and Debt/GDP Ratios Much Better than PDeveloped W ldD l d World Emerging Market fiscal deficits much lower than the le evels of developed markets Emerging Market Debt/GDP ratios exhibit long-term stability mStrong Fiscal Indicators in EM Lower Debt / GDP Ratios in EM(Fiscal Deficit as % GDP) (Debt as % GDP) 4 120 100 0 80 -4 60 -8 40-12 20-16 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E2013F2014F 2001 2003 2005 2007 2009 2011 2013F United Kingdom United Kingdom United States United States Eurozone Eurozone Emerging Markets Emerging MarketsData through October 2012 gForecasted or estimated results do not represent a promise or guarantee of future results and are subject to chan nge.Source: IMF For Professional Investors Only l 5 Lazard Asset Management
  6. 6. The History of Emerging M k t Sovereign SpreadsTh Hi t fE i Mark S ket i S d EMBIGD Spread 1600 Asian Financial Crisis BBB- 1400 Russian Default LTCM Blowup BB+ 1200 Mexico Upgraded to Argentina Default 1000 Investment Grade Brazil Election Turmoil Global Financial US BB Crisis Downgraded 800 Russia Up pgrade to Investmen Grade nt Greek Debt Crisis BB- Local Debt Issuance L 600 Surpasses External S Debt Issuance D Brazil Upgraded to Investment Grade 400 B+ 200 B 0 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Sovereign Spread represented by stripped spread (in bps) of JPMorgan EEMBI Global Diversified Index [LHS] Average credit rating of the JPMorgan EMBI Global Diversified Index [RH HS] Improved credit quality has led to lower spreads and lower volatilityAs of 31 December 2012Source: JP Morgan For Professional Investors Only l 6 Lazard Asset Management
  7. 7. Wide and Diverse Opportunity Set within Sovereign Credit yCountry DiffC Differentiation i the K y i i is h Key2000 A & AA BBB BB B B N/A16001200 EMBIG Spread (162 bps) EMBIG Spread (262 bps) June 1, 2007 January 31, 2013 y 800 400 0 Kazakhstan Georgia Jamaica Lebanon Ukraine Hungary Indonesia Mexico Uruguay Turkey Ecuador Peru China Poland Brazil Chile Malaysia Bulgaria Colombia Lithuania Panama Russia Croatia Gabon Serbia Argentina Ghana Pakistan Belize outh Africa El Salvador Jordan Nigeria Philippines Belarus Sri Lanka Venezuela Egypt Dominican Rep Co DIvoire Iraq ote V P So E K 31-Jan-13 1-Jun-07 Credit re-rating st tories still persistAs of 31 January 2013 yFor Belarus, Croatia, Gabon, Georgia, Ghana, Jamaica, Jordan, Kazakhstan, Lithuania, Nigeria, Sri Lanka there is no available data on June 1, 2007. We used instead the tightesthistorical spread. S&P does not rate Côte d’Ivoire and Iraq.Source: JPM and S&P. For Professional Investors Only l 7 Lazard Asset Management
  8. 8. Corporate Analysis:Overview of Emerging M kO i fE i Markets C Corporate D b M k Debt MarketDeep and Diverse Market Over 750 emerging market corporate issuers from 40+ emerging market countries + Issue sizes range from <$100 million to over $2.5 billio on Maturities range from one year to perpetualsGrowing Percentage of EM Debt Stock Since 2005, emerging market corporates have issued m more debt than emerging market sovereigns Emerging market corporates are expected to represent 75% of all new issuance 2011-2013 t Future development: liquid, tradeable EM corporate bonds denominated in local currency and expanded use of CDS (currently only 15 euroclearable local currency corporates from 5 countries) yStrong Fundamentals and Resilience During C Crisis Credit ratings of most EM corporates are restricted by sovereign ceiling y Balance sheet indicators tend to be much stronger in E when compared to similarly rated global comparables EM During 2008-2009 crisis, EM corporates exhibited low default rates than their global market peers as a result wer of stronger balance sheets and liquidity support from s sovereigns via discounted loans EM corporates aggressively bought-back debt during c crisis in order to monetize lower value of bonds Important that EM corporates manage balance sheets when looking to expand globally (organic or acquisition)As of 31 December 2012 and is subject to change.Source: JP Morgan, Lazard For Professional Investors Only l 8 Lazard Asset Management
  9. 9. Emerging Markets Corporate Debt vs Developed MarketsEM Off Offers Value V lEM Corporate Spread vs. US Corporate Spread EM Corporate Spread vs. US Corporate Spread p p p p(Investment Grade) (Non-Investment Grade) 300 2000 250 IG = + 85 bps 1500 BB = +93 bps B = +271 bps 200 1000 150 500 100 0 50 0 -500 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-05 Dec-07 Dec-09 Dec-11 CEMBI Diversified IG - IG U.S. Corporates CEMBI Diversified BB - U.S. Corporates (BB) CEMBI Diversified B - U.S. Corporates (B)As of 31 January 2013Source: JP Morgan and Barclays Capital For Professional Investors Only l 9 Lazard Asset Management
  10. 10. EM Local Yields Versus US Y YieldsEM Off Offers More Than a 5% Pick- V M Th % Pi k-up Versus US T Treasuries i800600400200 0 Jan-07 Jun-07 Nov-07 Apr-08 Sep-08 Feb-09 Jul-09 c-09 Dec May-10 Oct-10 Mar-11 Aug-11 Jan-12 Jun-12 Nov-12— EM Yield minus 5-year UST yield y y Room for EM rates to come down relative to US ratesAs of 31 January 2013Source: Lazard, JP Morgan For Professional Investors Only l 10 Lazard Asset Management
  11. 11. We believe EM Real Interest Rates Remain AttractiveRelative to Developed W ldR l ti t D l d WorldReal Interest Rates(%) 5.0 4.0 3.0 2.0 1.0 0.0-1.0-2.0 ry an Nigeria Russia Colombia es ny es ey zil India nd na Indonesia ea Malaysia ca co ru nd Chile Romania es Braz Hungar Philippine German Philippine Turke United State Japa Thailan Chin Kore Polan South Afric MexicAs of 31 January 2013 y PerReal interest rates are estimated as the difference between the current nominal 10-year rate and consensus infla ation forecast 2 years aheadSource: Lazard, JP Morgan, Haver Analytics For Professional Investors Only l 11 Lazard Asset Management
  12. 12. EM Currencies Have Room to Appreciate oValues at 2008 P C i i LV l Pre-Crisis Levels lREER Changes Since Pre-Crisis120115110105100 95 90 Dec-07 Dec 07 Dec-08 Dec 08 Dec-09 Dec 09 Dec-10 Dec 10 Dec-11 Dec 11 Dec-12 Dec 12 EM REER MAs of 31 January 2013Source: Lazard, JP Morgan, Haver Analytics For Professional Investors Only l 12 Lazard Asset Management
  13. 13. Drivers of R tDi f Returns i E in Emergin M k t Debt ing Markets D btEmerging Market Local Debt Returns Emerging Market External Debt Returns(%) (%) 40 40 29.8 8.0 30 23.0 23 0 22.0 22.2 22 2 18.1 16.8 17.4 20 16.9 15.7 20 9.1 7.3 15.2 7.5 2.1 10.2 6.3 7.1 6.0 11.6 30.7 12.2 6.9 6.7 7.3 9.9 6.2 10.4 4.4 10 11.2 6.7 0.4 10.6 11.7 3.1 5.5 5.3 8.0 4.3 16.2 8.0 6.7 9.7 6.3 6.7 11.4 6.7 0.7 7.4 11.0 7.7 77 8.8 88 8.1 81 6.0 60 4.4 4.4 2.8 2.8 4.7 4.9 6.6 5.8 4.6 0 1.6 1.7 0.4 -0.1 3.3 0 -0.4 0.9 -4.8 -0.4 1.0 -5.2 -1.8 0.5 -5.9 -1.7 -6.0 -5.6 -3.1 -8.9 -10.2-10 -9.1 -1.3 -16.0 -12.0 20-20 -20 -30.5-30-40 -40 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Return from Carry Return from UST Return from F/X Return from Carry Return from Rate Movements Return from Spread Compression Local Debt Total Return External Debt Total Return Yields Plus Potential FX Appreciatio & Spread Compression Attractive onAs of 31 January 2013External debt returns reflect the JPM EMBI Global Diversified Index.Local debt returns reflect the JPM GBI-EM Global Diversified Index.This is not intended to reflect the performance of any product or strategy managed by Lazard.Past performance is not a reliable indicator of future results.Source: J.P. Morgan For Professional Investors Only l 13 Lazard Asset Management
  14. 14. Emerging M k t Debt H a DiE i Markets D bt Has Discernable P fil bl ProfileRisk/Return Chart for 10 Years Ended 31 December 2 2012Return (%)1412 Local Debt EMD Hard C Currency EMD US High Yield10 8 US Long Treasury EM Currency Global Aggregate ex-US Unhedged US Credit 6 US Aggregate Global A Aggregate Unhedged US Treasury Global Aggregate Hedged gg g g 4 3-Month LIBOR 2 0 0 2 4 6 8 10 12 14 Standard Deviation Emerging Market Debt has outperformed other ass classes on an absolute and risk-adjusted basis set risk adjustedHard Currency EMD = JPM EMBI Global Diversified; Local Debt EMD = JPM GBI-EM Global Diversified ; EM Cu urrency = JPM ELMI+; US Aggregate = BC US Aggregate; US High Yield =BC US High Yield; Global Agg Hedged = BC Global Agg USD Hedged; Global Agg Unhedged = BC Global Agg U Unhedged; 3-Month LIBOR = ML 3-Mo USD LIBOR ; US Long Treasury =BC US Long Treasury Index ; US Credit = BC US Credit IndexThis is not intended to reflect the performance of any product or strategy managed by Lazard.All data as of 31 December 2012;Time period represents the longest shared history of all the asset classes. ( ; p p g y , , (the Local Debt EMD benchmark, JPM EMBI Global Diversified, launched inJanuary 2002.)Past performance is not a reliable indicator of future results. For illustrative purposes only.Source: Lazard, Bloomberg For Professional Investors Only l 14 Lazard Asset Management
  15. 15. Risk DisclosuresRi k Di lAll data contained herein is sourced by Lazard Asset Management unless otherwis noted. seCertain information included herein is derived by Lazard in part from an MSCI ind or indices (the “Index Data”). However, MSCI has not reviewed this product dexor report, and does not endorse or express any opinion regarding this product or r report or any analysis or other information contained herein or the author orsource of any such information or analysis. MSCI makes no express or implied wa arranties or representations and shall have no liability whatsoever with respect toany Index Data or data derived therefrom. The MSCI Index Data may not be furth redistributed or used as a basis for other indices or any securities or financial herproducts.This is a financial promotion and is not intended to be investment advice. In the U this document, which is supplied for information only, is for distribution only UKto professional investors and advisers authorised to carry out business under the F Financial Services and Markets Act 2000.References to Director and other titles of employees of Lazard Asset Management are internal titles and do not necessarily imply any legal status or responsibility. tSecurities identified in this document should not be considered as a recommendat tion or solicitation to purchase, sell or hold these securities. It should also not beassumed that any investment in these securities were, or will be, profitable. were be profitablePast performance is not a reliable indicator of future results. Fluctuations in the ra of exchange between the currency in which shares are denominated and the atecurrency of investment may have the effect of causing the value of your investmen to diminish or increase. Investors are reminded that the value of investments ntand the income from them is not guaranteed and can fall as well as rise due to mar and currency movements. When you sell your investment you may get back rketless than you originally invested.Yields from bonds reflect in part the risk rating of the bond issuer. Investment in l lower rated bonds increases the risk of default on repayment and the risk tocapital of the fund. High yielding assets may carry a greater risk of capital values fa alling or have limited prospects of capital growth or recovery.Investments in emerging markets carry an above-average degree of risk due to the undeveloped nature of the securities markets in those countries. Investorsshould consider carefully whether or not investment in emerging markets investments is suitable for them and, if so, how substantial a part of their portfolio suchinvestments should be.This financial promotion is issued and approved by Lazard Asset Management Lim mited, 50 Stratton Street, London W1J 8LL Lazard Asset Management Limited isincorporated in England and Wales with registered number 525667. It is authorise and regulated by the Financial Services Authority. edThe contents of this document are confidential and should not be disclosed other than to the person or persons for whom it is intended. For Professional Investors Only l 15 Lazard Asset Management