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Presentation viktor citywire

  1. 1. For Professional Use OnlyNot for public distributionEmerging Market DebtFebruary 2012Presentation toCitywire ConferenceViktor Szabo, CFA, Portfolio ManagerAberdeen Asset Management
  2. 2. Table of contents• Introduction to Aberdeen Asset Management• Why Aberdeen for EMD?• Investment team, philosophy and process• EMD solutions• Performance• Allocation• Appendices 1
  3. 3. About Aberdeen Asset Management• Aberdeen is an LSE listed* asset management Total assets under management $270.3bn company Money Markets - Sole focus on our clients portfolios and Property 5.1% their interests 11.4%• Global reach and local understanding Alternative Equities - 30 offices and over 500 investment Investment Strategies 46.6% professionals worldwide 14.2% - Investors based in all the key regions in which we invest, providing strong local Fixed Income knowledge 22.7%• Core investment expertise in emerging markets across both fixed income and equities Total emerging market assets $88.9bn** Asian Debt• Transparent investment processes $6.7bn - As fundamental investors, our investment decisions are based on our own research Asian Equities Emerging Market $31.8bn Equities $43.5bn* Since 1991 Emerging Markets Debt** Specialist mandates $6.9bnSource: Aberdeen Asset Management, 31 Dec 11 2
  4. 4. Why Aberdeen for Emerging Market Debt?• A strong global emerging markets footprint EMD assets under management $6.9bn*• A dedicated, stable, experienced team of specialists Local currency debt $1.9bn• A focus on the entire EMD universe• We avoid complex opaque structured products• We apply a forward looking, diversified approach to risk US$ denominated debt $5.0bn• Our size ensures investment flexibility* Including EMD assets carved out from other mandatesBreakdown of local currency versus US$ denominated debt (by benchmark)Source: Aberdeen Asset Management PLC, as at 31 Dec 11 3
  5. 5. Investment team, philosophyand process
  6. 6. Emerging Market resources London Brett Diment: Head of Global Emerging Debt Singapore Brett Diment* Edwin Gutierrez Devan Kaloo: Head of Global Emerging Equities Anthony Michael* Kevin Daly Kenneth Akintewe Esther Chan Scott Bennett Max Wolman Adam McCabe Viktor Szabo Chew May Tan Siddharth Dahiya Wah Yong Tan Flora Sexton Ee Leen Yeuh Anthony Simond Marisa Loh Andrew Stanners Mark Khoo Ewa Gray Ambrose Tan London Devan Kaloo* Budapest Hugh Young* Joanne Irvine* Flavia Cheong Andy Brown Chong Yoon-Chou Mubashira Bukhari Hong Kong Kristy Fong Susan McDonald Andrew Gillan Fiona Manning Bangkok Mark Gordon-James Kuala Lumpur Pruksa Iamthongthong Stephen Parr Singapore Gabriel Sacks Gan Ai Mee Osamu Yamagata James Thom Catriona Edmond Sao Paulo Adrian Lim Peter Taylor Louis Lu William Scholes Christopher Wong Thomas Reeves Budapest David Smith Jozsef Szabo Kuala Lumpur Equity resources Emerging markets offices Fixed Income resources Sao Paulo Suhaila Suboh Bangkok Edmund Goh Nick Robinson Jeremy Teng Brunella Isper Eduardo Figueiredo Pongtharin Sapayanon* Supakorn Tulyathan Gerald Ambrose* Hong Kong Bharat Joshi Jalil Rasheed Nicholas Yeo* Mohd Najman Md Isa Adithep Vanabrisksha* Andrew San Frank Tian Orsen Karnburisudthi Jolynn Kek Kathy Xu Ratanawan Saengkitikomol Evan Cheah Nicholas Chui Leverage off Aberdeen’s highly rated global emerging equity platform* Head of desk. Total number of investment professionals in Emerging is 70 (27 Fixed Income, 43 Equity). Includes affiliated persons under and inter-company agreementSource: Aberdeen Asset Management, Jan 12 5
  7. 7. EMD: the investment team• Stable and experienced team - With 12 people, we are one of the best resourced EMD teams - Average of 9 years’ experience in Brett Diment Edwin Gutierrez Kevin Daly EMD• Local presence brings local knowledge• Extensive primary coverage of sovereign and corporate issuers Viktor Szabo Esther Chan Max Wolman - We research over 50 countries and more than 100 corporate issuers - Expertise across each sub segment of the asset class Jozsef Szabo Siddharth Dahiya Andrew Stanners• Continuous collaboration with Asian debt and EM equity teams Anthony Simond Flora Sexton Ewa Gray 6
  8. 8. EMD: our investment philosophyWe believe:• A thorough forward looking fundamental approach supplemented by market technical analysis is key to understanding and pricing all relevant risk factors• Extensive resources are needed to deliver comprehensive primary coverage across the distinct sub segments of the EMD asset class• In constructing diversified portfolios capturing alpha opportunities across all the different segments of the asset class• In a benchmark aware, not benchmark driven approach 7
  9. 9. EMD: investment process Constructing diversified portfolios within Step 5: a risk-adjusted framework Portfolio Assessing relative value across the Step 4: investment universe Comparative analysis Forward looking assessment of Step 3: risk-adjusted returns Scenario analysis Step 2: Gauging market dynamics Technical analysis Proprietary sovereign and Step 1: corporate research Fundamental analysis 8
  10. 10. EMD solutionsEMD Plus – invests in hard currency sovereigns, quasi sovereigns and corporate bonds, local currency debt and FX• Pooled fund: Aberdeen Global – Select Emerging Markets Bond Fund ($1,101m)• Benchmark: JP Morgan EMBI GD• AUM: $2,382mEMD Local Currency – invest primarily in local currency debt and FX• Pooled fund: Aberdeen Global – Emerging Markets Local Currency Bond Fund ($165m)• Benchmark: JP Morgan GBI-EM GD• AUM: $1,915mEMD Core – invest primarily in hard currency sovereign and quasi sovereign bonds• No pooled fund• Benchmark: JP Morgan EMBI GD• AUM: $2,337mEM Corporates – invest in hard currency corporate bonds• Pooled fund: Aberdeen Global – Emerging Markets Corporate Bond Fund ($53m)• Benchmark: JP Morgan CEMBI BD• AUM: $600mAs of 31 Dec 11 9
  11. 11. EMD: performanceTo 31 Dec 11 Annualised 1 year 3 years 5 years Since inception Emerging Market Debt Plus Composite1 6.79 23.20 8.35 16.39 JP Morgan EMBI Global Diversified 7.35 16.08 7.87 11.35 Difference -0.55 +7.12 +0.48 +5.03 Emerging Markets Debt Core Composite2 7.89 19.44 7.95 12.87 JP Morgan EMBI Global Diversified 7.35 16.08 7.87 10.79 Difference +0.54 +3.36 +0.08 +2.09 Emerging Market Debt Local Currency Composite3 -2.20 - - 12.64 JP Morgan GBI-EM Global Diversified -1.75 - - 12.17 Difference -0.44 - - +0.47 Emerging Market Debt Corporate Composite4 - - - 1.49 JP Morgan CEMBI Broad Diversified - - - 1.93 Difference - - - -0.451. Inception: 1 Aug 992. Inception: 1 Jan 963. Inception: 1 May 094. Inception: 1 Feb 11Source: Aberdeen Asset Management. Total return, gross of fees, USD 10
  12. 12. Aberdeen Global – Select Emerging Markets Bond Fund Current portfolio positions (%) of total fund Country Portfolio (%) Benchmark (%) Hard currency Local currency FX (% of portfolio) Sovereign/ Corporate Quasi Argentina 4 2 4 Brazil 8 7 1 3 4 1 Chile 1 3 1 Dominican Republic 2 1 1 1 El Salvador 3 2 2 1 Mexico 14 7 9 1 4 4 Peru 3 4 2 1 Uruguay 2 2 2 2 Venezuela 7 4 7 Other* 8 Latin America total 44 40 26 7 11 7 Croatia 2 1 2 Hungary 1 2 1 Ivory Coast 2 1 2 Kazakhstan 3 3 2 1 Lithuania 3 2 3 Namibia 1 1 Qatar 2 2 Russia 6 6 5 1 Senegal 1 1 Serbia 1 1* Belize, Ecuador, South Africa 7 3 3 4Jamaica, Panama Turkey 5 6 4 1 UAE 3 2 1** Belarus, Bulgaria, Ukraine 1 3 1Gabon, Georgia, Other** 12Ghana, Iraq, Jordan, Europe/Middle East/Africa total 38 40 30 4 4Lebanon, Nigeria, China 5 3 2 2 1 1Poland Indonesia 3 6 2 1 Malaysia 3 3 1 2 2Source: Aberdeen Pakistan 1 1Asset Management Philippines 2 6 2Positions for the Sri Lanka 1 1 1Aberdeen Global Vietnam 1 1 1Select Emerging Asia total 16 20 10 3 3 3Markets Bond Fund, US/Cash 2 2 9031 Dec 2011 Total 100 100 68 14 18 100 11
  13. 13. Appendices
  14. 14. Aberdeen Global – Select Emerging Markets Bond FundFund characteristicsFund name Select Emerging Markets Bond FundFund domicile LuxembourgFund type SICAVPortfolio Manager Emerging Markets Debt teamFund currency USDFund size $1.1 billion as at 27/01/2012Benchmark JPM EMBI GD USDInception date 15 August 2001ValuationShare Class ISIN Daily Currency AMC Minimum investment A-2 LU0132414144 USD 1.50% USD 1,500A – 2 Hedged LU0376989207 EUR 1.50% EUR 1,500 I-1 LU0231480053 USD 1% USD 1,000,000 I–2 LU0231480137 USD 1% USD 1,000,000 13
  15. 15. Aberdeen Global – Emerging Markets Corporate Bond FundFund characteristicsFund name Aberdeen Global – Emerging Markets Corporate Bond FundFund domicile LuxembourgFund type SICAVPortfolio Manager Emerging Markets Debt teamFund currency USDFund size $64.9 millions as at 27/01/2012Benchmark JPM Corporate EMBI Broad DiversifiedInception date 30 December 2010ValuationShare Class ISIN Daily Currency AMC Minimum investment A-2 LU0566480116 USD 1.50% USD 1,500 I–2 LU0566481197 USD 1% USD 1,000,000 14
  16. 16. Aberdeen Global – Emerging Markets Local Currency Bond FundFund characteristicsFund name Aberdeen Global – Emerging Markets Local Currency Bond FundFund domicile LuxembourgFund type SICAVPortfolio Manager Emerging Markets Debt teamFund currency USDFund size $181.7 millions as at 27/01/2012Benchmark JP Morgan GBI-EM Global Diversified IndexInception date 6 April 2010ValuationShare Class ISIN Daily Currency AMC Minimum investment A-2 LU0396317926 USD 1.50% USD 1,500 I–2 LU0396318908 USD 1% USD 1,000,000 15
  17. 17. Step 1: fundamental analysis – proprietary research Hungary Serbia Lithuania Russia Poland Ukraine CroatiaRomania Georgia IMF/WB Kazakhstan Turkey Pakistan China Mexico Belize Egypt Qatar Jamaica Senegal UAE India Guatemala Dominican Rep Thailand Philippines Sri Lanka El Salvador VenezuelaIvory Coast Nigeria Iraq MalaysiaVietnam PanamaColombia Ghana Indonesia Ecuador Costa Rica Peru Brazil Namibia Uruguay South Africa Argentina Chile• 50 countries and over 100 corporates researched, with over 500 meetings each year• Fundamental research undertaken for each country: - Proprietary sovereign risk models - Focus on key macroeconomic variables, political environment, fiscal and monetary policy developments, major risks• Bottom-up corporate research to assess underlying creditworthiness of the companies in which we invest• Top down industry research 16
  18. 18. Step 2: technical analysisWe conduct technical analysis to assess Foreign holdings of local Hungarian Government debtthe impact on valuations of: % HGB 10Y yield (lhs) Foreign holdings (rhs) bn HUF• Supply risks 13 4,500• Positioning risks 12 4,000• Percentage of foreign versus local 11 ownership 10 3,500• Fund flows 9 3,000 8 7 2,500 6 5 2,000 Jan Nov Aug Apr Jan Oct Aug May Feb Nov Jul 04 04 05 06 07 07 08 09 10 10 11Source: GDMA, Bloomberg, Nov 11 17
  19. 19. Step 3: scenario analysis• We conduct scenario analysis for 50 Current Base case Risk scenarios % Worst Best Risk Draw- countries (6m) case case adjuste down d• Updated monthly South Africa Price 106.4 105.4 103.5 108.0 1.5 -0.2 External Spread 120 135 160 100• We forecast risk-adjusted returns for key Bond* USDZAR external and domestic bonds and foreign FX Spot 6.70 7.00 7.20 6.30 0.5 -4.2 Forecast exchange rates South Price 88.4 91.6 85.5 93.5 Africa• Base, best and worst case forecasts on Domestic Yield 8.5% 8.0% 9.0% 7.7% 3.9 -1.8 Bond* a one and six month horizon South Price 107.4 105.8 103.0 108.6 1.2 -1.2 Africa• Integral to our risk management process Corporate Bond** Spread 297 315 370 260Source: Aberdeen Asset Management, Apr 11Risk adjusted: % weighted return using 50% for base case return, 20% for best case return and 30% for worst case return plus 6 months of accrued interestDrawdown: 6 months worst case return plus 6 months of accrued interest* 10 year bonds, ** 6 year bondHypothetical positions are used here and actual market conditions may have a different impact on the portfolio. A portfolio may not include these securities.For illustrative purposes only. Past performance is not an indications of future results and you may lose money by investing.Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed and actual events or results may differ materially 18
  20. 20. Step 4: comparative analysis• We assess the relative value between: Expected risk-adjusted return % - Individual country yield curves 8 7 - Hard currency sovereign and corporate 6 Argentina 10yr USD bonds 5 South Africa 10yr ZAR 4 - External versus domestic bonds 3 2 - Emerging market currencies Alrosa Thai Baht 1 In order to identify the instruments that have 0 the most attractive risk-return profiles and -1 -2 evaluate their impact on the portfolio as a -3 whole -4 0 -1 -2 -3 -4 -5 -6 -7 Risk (worst case return %)Source: Aberdeen Asset Management, Apr 11Six month expectation of returns. Countries used for hypothetical and illustrative purposes onlyProjections are offered and are not reflective of potential performance. Projections are no guaranteed and actual events or results may differ materiallyActual market conditions may have a different impact on the portfolio. No assumptions regarding future performance should be made 19
  21. 21. Step 5: current portfolio positions Constructing a diversified, risk-controlled portfolio (%) of total fund Country Portfolio (%) Benchmark (%) Hard currency Local currency FX (% of portfolio) Sovereign/ Corporate Quasi Argentina 4 2 4 Brazil 8 7 1 3 4 1 Chile 1 3 1 Dominican Republic 2 1 1 1 El Salvador 3 2 2 1 Mexico 14 7 9 1 4 4 Peru 3 4 2 1 Uruguay 2 2 2 2 Venezuela 7 4 7 Other* 8 Latin America total 44 40 26 7 11 7 Croatia 2 1 2 Hungary 1 2 1 Ivory Coast 2 1 2 Kazakhstan 3 3 2 1 Lithuania 3 2 3 Namibia 1 1 Qatar 2 2 Russia 6 6 5 1 Senegal 1 1 Serbia 1 1* Belize, Ecuador, South Africa 7 3 3 4Jamaica, Panama Turkey 5 6 4 1 UAE 3 2 1** Belarus, Bulgaria, Ukraine 1 3 1Gabon, Georgia, Other** 12Ghana, Iraq, Jordan, Europe/Middle East/Africa total 38 40 30 4 4Lebanon, Nigeria, China 5 3 2 2 1 1Poland Indonesia 3 6 2 1 Malaysia 3 3 1 2 2Source: Aberdeen Pakistan 1 1Asset Management Philippines 2 6 2Positions for the Sri Lanka 1 1 1Aberdeen Global Vietnam 1 1 1Select Emerging Asia total 16 20 10 3 3 3Markets Bond Fund, US/Cash 2 2 9031 Dec 2011 Total 100 100 68 14 18 100 20
  22. 22. EMD: case studyHungary Adding value in Hungarian local rates Forecasts – Jun 09 Current 1 month 6 month Best Worst HGB 10Y generic (lhs) EURHUF (rhs) Central bank rate 13 320 Repo rate (%) 10.00 10.00 8.00 12 310 EURHUF forecast Spot 279 270 260 255 330 11 a i 300 10 year bond (%) 10.40 10.00 8.30 8.00 12.80 10 290 Forecasts – Dec 10 9 280 Current 1 month 6 month Best Worst c f 8 270 Central bank rate e Repo rate (%) 5.50 5.50 5.50 7 h 260 g EURHUF forecast b d 6 250 Spot 278 280 280 270 295 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 10 year bond (%) 8.18 8.00 7.50 6.65 8.50a) Built position in local rates and currency in June 2009 following a country research trip in April 2009 and limited foreign ownershipb) Cut rates positions in April 2010 over concerns of contagion from the Greece fiscal crisis and risks related to local electionsc) Re-entered a long position in June 2010 after a sharp sell off and attractive valuations, following calls to our Hungarian officed) Took profits in late July 2010 after monthly policy meeting showed little further upsidee) Increased rates exposure in anticipation of a new stabilisation program (finally announced in March). The decision was supported by a country research trip.f) Cut overweight currency position in late February (EURHUF at 271), as we saw limited appreciation potentialg) Gradually reduced rates exposure over the summer as implementation risks increased, and went underweight on currency (EURHUF at 275)h) Neutralised rates position in July 2011 on increased two-way uncertaintyi) Increased short HUF position in late October on deepening euro-area debt crisis (EURHUF at 300)Source: Bloomberg, Aberdeen Asset Management, Nov 11 21
  23. 23. EMD: case studyLithuania Forecasts – Feb 10 Current 1 month 6 month Best Worst Price Lithun 2015 Lithun 2020 USD 01/2015 price 102.2 103.4 103.8 105.1 98.2 120 spread 388 361 352 321 486 d g 115 f e USD 02/2020 price 100.9 101.6 102.7 106.3 92.5 110 c spread 356 345 330 281 481 105 Forecasts – Oct 10 Current 1 month 6 month Best Worst a USD 01/2015 price 111.7 109.4 111 114 104 100 spread 276 300 285 220 430 b 95 Oct 09 Jan 10 Apr 10 Oct 10 Jan 11 Apr 11 Oct 11 Jul 10 Jul 11 USD 02/2020 price 117.2 114.8 116 118.5 112.5 spread 266 280 273 250 315a) Started to build exposure as our country research trip (Nov 2009) confirmed a strong fiscal commitment and low default probabilityb) Increased position participating in the issuance of the new 2020 bondsc) Took profits following the rally on weaker economic data, but kept overweight exposured) Reduced exposure as valuations became over-stretchede) Added exposure on faster-than-anticipated economic recoveryf) Took profits on valuation and euro crisis concernsg) Took further profits on valuation and euro crisis concernsSource: Bloomberg, S&P, Aberdeen Asset Management, Oct 11 22
  24. 24. EMD: corporate trade example MOBTEL 06/22/2020 CHMFRU 10/25/20171100 Switch from CHMFRU into MOBTEL at a OAS spread of 57bps on 21 Oct1000 OAS spread 121bps as of 14 Dec 900 800 700 600 500 400 300 200 31-Mar-11 30-Apr-11 31-May-11 30-Jun-11 31-Jul-11 31-Aug-11 30-Sep-11 31-Oct-11 30-Nov-11• Trade was initiated on the 21 October, switching Severstal 17s into Mobtel 20s• Rationale for the trade was to reduce the portfolios weighting in the metals and mining sector due to concerns over slowing global demand for metals• Fund increased exposure to the telecoms sector which is less cyclical than the commodity sector
  25. 25. EMD: our distinguishing features• A strong global emerging markets footprint• A dedicated, stable, experienced team of specialists• A focus on the entire EMD universe• We avoid complex structured products• We apply a forward looking, diversified approach to risk• Our size ensures investment flexibility 24
  26. 26. Sovereign risk models• Quantitative models supplement our External debt fundamental analysis 800 Venezuela 1262bp Yield spread over treasuries (bp) Ukraine• External inputs: 600 - Economic strength (25%) 400 Jamaica Dom Rep - Economic cycle (25%) 200 Turkey Russia Philippines Peru - Solvency (25%) 0 10 15 20 25 30 35 40 - Liquidity (25%) Market score Source: Aberdeen Asset Management, Nov 11 Domestic debt• Domestic inputs: 15 Egypt - Macroeconomic trends (25%) Yield on 10 year bonds Brazil - Inflation dynamics (25%) 10 Turkey South Africa - Savings rates (25%) Poland Mexico 5 Indonesia Malaysia - Financial system strength (25%) 0 0 5 10 15 20 25 30 35 40 Market score Source: Aberdeen Asset Management, Nov 11 25
  27. 27. EMD 2012 outlook• Softer global growth, but backdrop still constructive for EMD• Chinese growth will continue to moderate, consensus of 8.3% for 2012• ECB support for banks via LTRO is supportive for risk assets• Hard currency spreads attractive given low default risk, corporates also offer good value• EMFX and corporates poised to outperform as risk appetite increases• Inflows into EMD have slowed, but are likely to resume with interest rates expected to remain lower for longer• Risks: Eurozone sovereign debt crisis, China hard landing 26
  28. 28. Diverging credit trends between EM and DM countries DM vs EM sovereign credit ratings EM rating DM rating BBB AAA BBB- AA+ BB+ AA BB AA- BB- A+ 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011Source: Morgan Stanley, Aug 11 27
  29. 29. Sovereign debt iceberg … General Government Debt (% GDP) vs Government Balance (% GDP) Japans Govt. Debt is 233% Eurozone G10 Asia CEEMA LatAm Gross General Government Debt for 2011 (% of GDP) 180 Japan Greece 160 Jamaica 140 Lebanon Italy 120 Barbados Ireland Portugal 100 USA Belgium France Canada Germany 80 UK Egypt Hungary Netherlands Spain Brazil India Egypt 60 Poland Malaysia Philippines Vietnam Thailand Norway CroatiaLithuania Salvador El Switzerland Serbia Ukraine Iraq Slovenia Venezuela ArgentinaBelarus 40 South Africa Colombia Panama Turkey Sweden Georgia Indonesia Korea Costa Rica Peru Qatar 20 China Guatemala Luxembourg UAE Australia Russia Kazakhstan Chile Saudi Arabia 0 -12.00 -10.00 -8.00 -6.00 -4.00 -2.00 0.00 2.00 4.00 6.00 8.00 10.00 12.00 14.00 General Government Balance for 2011 (% of GDP)Source: IMF, World Economic Outlook Database, Sep 11 28
  30. 30. China has resources to address credit and growth risks China’s public debt is manageable Local debt maturity timetable (%) 250 After 2015 By 2013 30% 53% 200 150 100 Local debt 50 2014 - 15 17% 0 Japan Greece Italy US India Brazil China RussiaSource: HSBC, Jul 11 Source: HSBC, Jul 11 29
  31. 31. Ratings quality of emerging market countries underappreciated S&P breakdown of EMBIG Diversified S&P breakdown of GBI EM Global Diversified NR AA AA A BB 0.2% 1.3% 2.6% 10.5% 8.7% B 17.2% A BBB 48.8% 47.3% BBB 40.5% BB 22.9%• External debt index is 59% investment grade • Domestic debt index is 89% investment gradeSource: JP Morgan, 30 Sep 11 30
  32. 32. Spreads attractive given low default risk Spread over US Treasuries JPM EMBI GD JPM CEMBI BD 1000 900 800 700 600 500 400 300 200 100 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012Source: JP Morgan EMBI Global Diversified, 20 Jan 12 31
  33. 33. EMD yields look anomalous in “lower for longer” world EM external, domestic and corporate indices are all investment grade Yield (%) EM Local currency (BBB+) EM Hard currency (BBB-) EM Corporates (BBB) US 10 yr (AA+) German 10yr (AAA) 14 12 10 8 6 4 2 0 May 03 Sep 03 May 04 Sep 04 May 05 Sep 05 May 06 Sep 06 May 07 Sep 07 May 08 Sep 08 May 09 Sep 09 May 10 Sep 10 May 11 Sep 11 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11EM Local currency index: JPM GBI-EM GD, EM Hard currency index: JPM EMBI GD, EM Corporate index: JPM CEMBI BDSource: JP Morgan, S&P, Bloomberg, Nov 11 32
  34. 34. Real yields yet to reflect dramatic improvement in fundamentals Country 10 Year Bond Yield (%) Inflation yoy (%) Real yield Credit rating S&PBrazil 11.6 6.5 5.1 A-Hungary 8.8 4.1 4.7 BB+Colombia 7.3 3.7 3.5 BBB+Russia 8.2 6.1 2.1 BBB+Mexico 5.7 3.8 1.9 A-Indonesia 5.6 3.8 1.8 BB+South Africa 7.7 6.1 1.6 AJapan 1.0 -0.5 1.5 AA-Poland 5.6 4.6 1.0 APeru 5.7 4.7 0.9 BBB+Malaysia 3.4 3.0 0.4 AGermany 1.9 2.1 -0.2 AAAThailand 3.2 3.5 -0.3 A-US 1.9 3.0 -1.1 AA+Turkey 9.3 10.5 -1.2 BBB-UK 2.1 4.2 -2.1 AAASource: S&P, Bloomberg, 26 Jan 12 33
  35. 35. Shrinking DM financial balance sheets not a threat to EM EM financial system aggregate loan/deposit ratio Asia Latin America Central Eastern Europe 120% 115% 110% 105% 100% 95% 90% 85% 80% 75% 70% 2003 2004 2005 2006 2007 2008 2009 2010 2011Source: IMF, CEIC, Haver, UBS estimates Net foreign positions of DM banks in EM % of GDP Asia Latin America Central Eastern Europe 12% 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% 2003 2004 2005 2006 2007 2008 2009 2010 2011Source: IMF, CEIC, Haver, UBS estimates 34
  36. 36. China: growth moderating, but remains on track GDP growth slowed further in Q4 11, but …supported by the resilient retail Industrial production growth softened still surprised on the upside… consumption China real GDP (%YoY) China retail sales (%yoy, 3m mav) China industrial production (%yoy, 3m mav) 13 20 22 12 19 20 11 18 18 17.5 10 17 16 9 16 14 8.9 12.8 8 15 12 7 14 10 Mar 10 Jun 10 Sep 10 Mar 11 Jun 11 Sep 11 Dec 10 Dec 11 Jun 10 Sep 10 Jun 11 Sep 11 Mar 10 Dec 10 Mar 11 Dec 11 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11 • Recent growth data supports a ‘soft landing’ • Inflation continues to moderate and provides scope for further easingSource: NBS, Credit Suisse, Jan 12 Source: NBS, PBoC, Credit Suisse, Jan 12 Source: NBS, Credit Suisse, Jan 12 35
  37. 37. Brazil: inflation pressures easing, FDI remains robust Brazil: Median market forecast for IPCA Brazil: Foreign Direct Investments inflation % y-o-y Intercompany loans (net) Private equity (net) USDbn, cumulative 12mths 8.5 80 75.4 76.3 75.1 72.2 7.5 7.6 68.9 70 13.5 63.8 64.2 17.3 16.3 Upper limit of target 95% 60.5 16.4 6.7 60 15.2 6.5 6.3 55.8 12.7 14.2 12.3 5.9 5.9 90% 48.4 50.8 5.7 50 11.0 5.5 9.6 Center of 5.3 68% 38.2 8.3 the inflation 50% 40 36.1 target range 4.5 4.5 6.9 4.3 50% 6.1 30 60.1 61.6 68% 55.8 58.1 48.2 51.0 50.0 53.7 3.5 44.8 4.5 90% 20 40.1 41.2 3.1 29.9 31.3 2.5 10 95% 1.5 0 Feb 11 May 11 Jul 11 Oct 10 Nov 10 Dec 10 Jan 11 Mar 11 Apr 11 Jun 11 Aug 11 Sep 11 Oct 11 Dec 04 Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11 Dec 12 Dec 13 • Growth is declining along with inflation pressures • Significant foreign investment in the pipeline for the years ahead (oil and gas sector, Olympics, World Cup) will remain supportive for the economySource: IBGE, Credit Suisse, Oct 11 Source: Central Bank of Brazil, Credit Suisse, Oct 11 36
  38. 38. Mexico gaining export competitiveness vs China Unit labour cost in manufacturing Minimum wage in Mexico (2011) MXN per day USD per day Index (2001=100) Mexico China Mexico City 59.82 4.73 155 Monterrey, Nuevo Leon 58.13 4.60 State of Michoacan 56.70 4.49 145 Minimum wage in China (2011) 135 RMB per month USD per day Guangzhou City 1,300 6.40 125 Jiangsu Province 1,140 5.61 Shaanxi Province 860 4.23 115 105 95 2001 2003 2005 2007 2009 • Mexico continues to gain market share of US imports • Improving US growth will be supportive for Mexican economy Note: Assuming a 30 day month, we use average 2010 USD/MXN exchange rate of 12.636 and USD/RMB exchange rate of 6.7704 to make the conversion Source: Nomura Global Economics; Xinhua News; local government websites in China;Source: Bloomberg, Haver Analytics, OECD, Mar 11 Mexican Labor Ministry, Mar 11 37
  39. 39. Venezuela: comfortable financing outlook Public-sector liquid assets and external debt Public-sector debt amortizations $bn Gross gold FX reserves Other public sector liquid FX holdings* $bn Sovereign - domestic Sovereign PDVSA Gross non-gold FX reserves Public sector external bond debt 75 22 20 18 60 16 14 45 12 10 30 8 6 15 4 2 0 0 2023+ 2011 2012 2015 2016 2017 2018 2019 2020 2022 2013 2014 2021 Q1 10 Q3 10 Q4 10 Q1 11 Q1 09 Q2 09 Q3 09 Q4 09 Q2 10 Q2 11 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 • High oil prices will remain supportive for high yielding Venezuelan bonds • Strong willingness and capacity to service debt* Includes cash holdings in government agencies and PDVSASource: Central bank, Credit Suisse, Sep 11 Source: PDVSA, Ministry of Finance, Credit Suisse, Sep 11 38
  40. 40. Malaysia: CNY proxy Commodities led export growth FDI in Malaysia has improved Electrical and electronics export (RM bn) FDI inflows (4q rolling sum, % of GDP) Palm oil, LNG, and oil exports (RM bn) 6 26 5 21 4 16 3 2 11 1 6 0 2007 2008 2009 2010 2011 Jun 01 Dec 03 Jun 06 Dec 08 Jun 11 • Strong current account surplus and increased foreign investment • Modest appreciation of the Chinese Renminbi is supportive for the Malaysian RinggitSource: CEIC, Credit Suisse, Sep 11 Source: CEIC, Credit Suisse, Sep 11 39

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