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2017 Market Outlook - Emerging Markets Debt

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Portfolio Manager Samy Muaddi, CFA, discusses his perspective on the current emerging markets debt environment and what investors could expect to see in 2017.

Published in: Economy & Finance

2017 Market Outlook - Emerging Markets Debt

  1. 1. EMERGING MARKETS DEBT Samy Muaddi, CFA Portfolio Manager November 17, 2016 2017 Global Market Outlook Press Briefing
  2. 2. 2 Emerging Market Vulnerabilities Have Structurally Declined Developed Countries Mainstream Emerging Countries and Second- Tier Countries Frontier Emerging Countries
  3. 3. 3 Where Are We in the Cycle? FOUR FACTORS TO CONSIDER 1 Fiscal 2 External 3 Social and Political 4 Private Sector
  4. 4. 4 Sources: T. Rowe Price and International Monetary Fund. 1. Fiscal Vulnerabilities Are Less Evident Across Emerging Markets (EM) $0 $20,000 $40,000 $60,000 $80,000 $100,000 $120,000 $140,000 $160,000 1990 1995 2000 2005 2010 2015 Millions—USD HISTORICAL AMOUNT OF IMF ASSISTANCE OUTSTANDING Total IMF Loans Oustanding Total Less Greece/Portugal/Ireland 20 30 40 50 60 70 80 90 100 110 120 130 2001 2003 2005 2007 2009 2011 2013 2015 2017 (F) 2019 (F) %ofGDP EM VS. G7 PUBLIC DEBT 2016–2019 forecast Major Advanced Economies (G7) Emerging Markets
  5. 5. 5 Sources: T. Rowe Price and Haver Analytics. Current account balance chart is based on countries as follows: Mexico, Indonesia, Russia, China, Turkey, Brazil, Venezuela, Colombia, Chile, Hungary, South Africa, Kazakhstan, Lebanon, Peru, Poland, Ukraine, Panama, Malaysia, Bolivia, Costa Rica, Ecuador, Guatemala, Paraguay, Uruguay, Jordan, Oman, Egypt, India, Pakistan, Vietnam, Ghana, Ivory Coast, Kenya, Morocco, Nigeria, Tunisia, Azerbaijan, Belarus, Georgia, Slovakia, Latvia, Serbia, Lithuania, Croatia, Romania, Dominican Republic, Bahrain, Iran, Israel, Qatar, Saudi Arabia, United Arab Emirates, Palestinian Territories, Bangladesh, Korea, Macau, Thailand, Algeria, Botswana, Mauritius, Uganda, Albania, Kyrgyz Republic, Bulgaria, Czech Republic, Estonia, Slovenia, Macedonia, Bosnia and Herzegovina, and Kosovo. 2. External Vulnerabilities Have Cyclically and Structurally Adjusted -3.5% -3.0% -2.5% -2.0% -1.5% -1.0% -0.5% 0.0% 0.5% 1.0% 1995 1998 2001 2004 2007 2010 2013 2016 CAasaPercentofGDP(SA,%) EM CURRENT ACCOUNT BALANCE— FOUR-QUARTER ROLLING AVERAGE 0% 10% 20% 30% 40% 50% 60% 1995 1998 2001 2004 2007 2010 2013 2016 Year-Over-YearChangeinCPI EM INFLATION
  6. 6. 6 As of September 30, 2016 Sources: T. Rowe Price and CRB Rates. 2. The Monetary Policy Response Function Is Increasingly Unsynchronized May 2005 – June 2006 Interest rates up Interest rates down Interest rates upInterest rates stable UK Eurozone Russia Australia Canada Philippines South Korea India Indonesia Mexico U.S. South Africa 2015 Brazil 77 cuts 66 hikes Colombia 2016 YTD 58 cuts 31 hikes ILLUSTRATIVE INTEREST RATE CYCLE
  7. 7. 7 Source: Peterson Institute, January 2016. 3. Global Trends in Wealth Accumulation Favor EM Consumption 0 10 20 30 40 50 60 70 80 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 GrowthRateinPercentage Percentiles of the Global Income Distribution CUMULATIVE INCOME GROWTH RATE SINCE 1990s POORER RICHER
  8. 8. 8 Sources: Images 1‒4 are public domain; Image 5: Creative Commons, www.kremlin.ru; Image 6: Creative Commons, Licurgo Miranda. 3. Markets Often Follow the Leader UPCOMING CATALYSTS  China 19th party congress  Brazil pension reform  Venezuela resolution  Russian sanctions  African National Congress (ANC) elective conference  Turkey constitution  Argentina parliamentary election  Ecuador general elections  Nigeria local elections 4 5 1 3 2 6
  9. 9. 9 Sources: T. Rowe Price, J.P. Morgan, Bank of America, Fitch Ratings, and Bank for International Settlements (BIS). *For bond issuers. 4. Private Sector Contingent Liabilities 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 2008 2009 2010 2011 2012 2013 2014 2015 LTM NetLeverage(exRealEstateandDefaults) GLOBAL EM CORPORATE NET LEVERAGE TREND* EM Corp. Global Asia EM Europe Latin America Middle East/Africa 73% 13% 10% 4% DISTRIBUTION OF EM CORPORATE LEVERAGE BY SOURCE Local Banks Local Currency Bonds BIS Claims USD Bonds
  10. 10. 10 As of December 31, 2015 Sources: T. Rowe Price and Haver Analytics. 4. China’s USD $30 Trillion Dollar Problem 0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0 100.0 GLOBAL EM LONG-TERM HISTORY OF CREDIT TO GDP (%) All EM Mean South America Mean Central America Mean CEE Average Africa Mean ex SOAF Mideast Mean Asia Mean 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 GDPGrowth/NonfinancialPrivateSectorCreditGrowth EFFECTIVENESS OF CHINA’S CREDIT EXPANSION WEAKENING
  11. 11. 11 Where Are We in the Cycle? FOUR FACTORS TO CONSIDER 1 Fiscal 2 External 3 Social and Political 4 Private Sector
  12. 12. 12 Emerging Markets Offer a Compelling Yield and Duration Profile As of September 30, 2016 Sources: T. Rowe Price, Bloomberg Barclays, J.P. Morgan, and MSCI. Returns are in U.S. dollar terms. Benchmarks: J.P. Morgan EMBI Global, J.P. Morgan GBI – EM global diversified; J.P. Morgan CEMBI Broad Diversified, Bloomberg Barclays European High Yield, Bloomberg Barclays, U.S. High Yield, Bloomberg Barclays U.S. Corporate Investment Grade, Bloomberg Barclays European Corporate Investment Grade, Bloomberg Barclays U.S. Aggregate – U.S. Treasury; Bloomberg Barclays Global Aggregate ex U.S., Bloomberg Barclays Global Aggregate – German bund; Bloomberg Barclays Global Aggregate – Japanese government bond. U.S. Treasuries AAA U.S. IG Corporates A- U.S. High Yield B+ EM Sovereign Hard Currency BB+ EM Corporate BBB- EM Sovereign Local Currency BBB+ International Bonds Euro IG Corporate A- Euro HY BB JGB A+ Bunds AAA -2 0 2 4 6 8 3 4 5 6 7 8 9 10 11 Yield(%) Duration (Years) With more than USD $10 trillion in developed market sovereign debt offering negative yields, emerging markets provide an attractive yield and duration profile alongside a history of compelling long-term risk-adjusted returns.
  13. 13. 13 Emerging Markets Still Offer Relative Value As of October 31, 2016 Sources: T. Rowe Price and J.P. Morgan. Major developed USD bond yields represented by the average of U.S., Germany, Japan, UK 5 and 10-year yields. 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 YieldDifferential(%) YieldtoMaturity(%) EM VS. DEVELOPED SOVEREIGN YIELD HISTORY Differential (R) EM Sovereign Bond Yields in USD Average of Major DM Government Bond Yields
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  15. 15. THANK YOU.

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