Deep dive into Emerging Markets Corporate Debt · the market capitalization of the J.P. Morgan...

For institutional investors only / not for public viewing or distribution

Asset Management

Fixed Income Boutique

Vontobel – Emerging Markets

Deep dive into Emerging Markets Corporate Debt

Approved for institutional investors in LU, AR, UY (Professional Investors only)

March 2020

Wouter van Overfelt

This document was produced for the

meetings taking place in Argentina and Uruguay

during 09th, 10th, 11th and 12th March

2020. It is not for onward distribution to

any third parties.

Overview

Why now? The 7 Goals

Market Outlook

Frequently Asked Questions

Conclusion

3


Investors wish list? 7 goals

High

Yield

Low

Duration

Low

Default Risk

Well

diversified

Low

Volatility

Limited

Drawdowns and

Performance

Convexity

Decorrelated

01 03 05 07

02 04 06

4


1 & 2. EM Corporates: high relative spread/low duration

Bubble size represents

market value in bn USD

Source: ICE BofA Merrill Lynch US Corporate Index, ICE BofA Merrill Lynch Euro Corporate Index, J.P. Morgan CEMBI Broad Diversified, J.P. Morgan EMBI Global Diversified,

ICE BofA Merrill Lynch US High Yield Index, ICE BofA Merrill Lynch Euro High Yield Index, as of 31.12.2019, Bloomberg. Average index ratings indicated within the brackets.

EM Corp HY (BB-, 424)

EUR Corp IG (A-, 2625)

EM Sov/Qsov (BB+, 1152)

US HY (B+, 1242)

EUR HY (BB-, 306)

US Corp IG (A-, 7307)

EM Corp (BBB-, 1079)

0

100

200

300

400

500

600

2 3 4 5 6 7 8 9

Sp

read

Duration

5


1. The importance of high yield

We observe a link in spread markets between the starting yield and the performance which

is effectively achieved over a 5-year rolling holding period

Note: each dot represents an annual, rolling, 5-year annual return versus the original yield of the index.

Source: Vontobel Asset Management, Bloomberg, from 31.12.2001 to 31.12.2019.

31.12.2019

31.12.2019

31.12.2019

31.12.2019

31.12.2019

-5%

0%

5%

10%

15%

20%

25%

0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 22% 24% 26%

An

nu

alized

To

tal R

etu

rn (

over

5 Y

ear

Tim

e H

orizon)

Starting Yield to Maturity

EM Sov

EM Corp

EM Corp HY

US Corp IG

US HY

6


Difference in consequences of defaults in DM versus EMEM HY default rate versus DM

39%

35%

25%

2%

55%

10%

23%

12%

0%

10%

20%

30%

40%

50%

60%

Missed payments(interest and/or principal)

Bankruptcy Distressed exchange Other*

DM EM

Much less outright bankruptcies meaning more

room to negotiate recovery levels

Source: J.P. Morgan “Emerging Markets Corporate 2019 Review – performance, defaults, and supply”, as of 07.01.2020 (l.h.s.). Moody’s Investor’s Service “Emerging and

Advanced economy default rates are similar, but with different catalysts”, as of March 2018 (r.h.s.).

3. Low default risk

Looking ahead to 2020, the lowest default rate is expected for European credit at 2.0%, followed by EM HY corporates at

2.4%, and US HY with 3.0%.

7


3. Low default risk:Fundamentals in EM Corporate compare favorably to DM equivalents

Source: JP Morgan, as of 30.09.2019.

8


4. Well diversified...at the issuer level

Source: J.P. Morgan “2020 Outlook: Sharpe and steady wins the race”, as of November 2019.

408

490

582 784 961

1.1

27

1.0

41

1.1

10

1.2

61

1.3

74

1.4

83

197 219 2

79

323

419

507

621 7

04

815 787

896

0

500

1.000

1.500

2.000

2.500

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Bo

nd

sto

ck

(in U

SD

bn)

Investment Grade High Yield & Non-rated

Total EM Corporate external bond stockNumber of countries & issuers in EMBI & CEMBI

9


4. Well diversified

Source: Bloomberg, J.P. Morgan, as of 06.01.2020.

Sector breakdownGeographic breakdown

CEMBI BD has more Asia and Middle East, less Africa, CEE and Latam than

EMBI GD

With a broad sector diversification, less exposed to Financials than DM, and

not just an energy play

37%

28%

17%

11%

7%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Asia Latin Middle East Europe Africa

30%

13%

6%

11%

9%

6%

25%

0%

5%

10%

15%

20%

25%

30%

35%

Financial Oil & Gas Metals &Mining

Utilities Consumer RealEstate

Others

USD REVENUES ALM MAINLY LC OTHERS

10


5 & 6. Low volatility / Limited Drawdowns: Emerging corporates have strong metrics

Emerging Corporates specifically have not historically proved to be as volatile as investors expect

Past performance is not a reliable indicator of current or future performance.Source: Vontobel Asset Management, Bloomberg, 13.11.2015-31.01.2020.

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

JP

MC

EM

BI (C

orp

)

Barc

lays

Glo

bal A

gg

US

Corp

Euro

Gov

US

T In

dex

JP

ME

MB

I (S

ov)

US

HY

JP

MG

BI-

EM

(L

C)

MS

CI

Wo

rld

S&

P 5

00

MS

CI

EM

Annualized Volatility Max. Drawdown

11


5. Low volatility: Elevated risk adjusted returns for EM Corporate as historically (low) risk has been well remunerated…

Source: Vontobel Asset Management, Bloomberg, as of 27.09.2019.

1,5

1,0

1,4

0,3

1,2

1,4 1,4

1,2

0,2

0,9

1,4

1,1

1,6

0,4

1,5

1,8

2,0

1,4

0,2

1,0

1,7

0,9

1,1

0,2

0,9

1,0

0,7

0,8

0,3

0,7

0,0

0,5

1,0

1,5

2,0

2,5

EMCorporates

EMSovereigns

NEXGEM EM LocalCurrency

US IG US HY Euro IG Euro HY MSCI EM S&P 500

Since 2010 2010 - 2014 2015 - current

….and even improved in the past few years

12


How long does it take you to recover? Five worst losses since 2007

6. Cross asset focus on historical drawdowns

Source: Vontobel Asset Management, Bloomberg.

Barring 2008, losses have not exceeded >10% (index). Crucially, recoveries are quick, certainly compared to equity but

also compared to US Treasuries (see r.h.s.) .

Days

13


7. Emerging Markets Corporate Debt: Cross asset correlations

Distribution of 6-month rolling correlation of the J.P. Morgan CEMBI Broad Diversified index with

major asset classes based on weekly data

Past performance is not a reliable indicator of current or future performance.Net performances indicated. Performance data does not take into account any commissions and costs charged when

shares of the fund are issued and redeemed, if applicable. *Bloomberg Commodity Index.

Source: Bloomberg, Vontobel Asset Management, correlation coefficients as of 31.01.2020.

-40%

-20%

0%

20%

40%

60%

80%

100%

Overview


Market Outlook


Conclusion

15

But we are monitoring scenarios that could disrupt consensus…

Source: IMF.

Coronavirus

The Next Recession

No Deal Brexit

Falling Liquidity

US Dollar

Trade War

Current situation…

US Elections

Inflation

For Institutional Investors only / not for public viewing or distribution

Source: IMF.

16


Post GFC Average: 5,57

0

2

4

6

8

10

12

14

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5

201

6

201

7

201

8

201

9

Post GFC Average JPM CEMBI BD Yield

Valuations: Yield. Trading slightly tighter than historical averages

Past performance is not a reliable indicator of current or future performance.Source: JP Morgan, Vontobel Asset Management, as of 31.01.2020.

GFC: Global Financial Crisis.

Fed hiking cycleFed hiking cycle

Still attractive compared to other asset classes

17


Post GFC Average; 345

0

200

400

600

800

1000

1200

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5

201

6

201

7

201

8

201

9

Post GFC Average JPM CEMBI BD Spread

Valuations: Spread. Trading slightly tighter than historical averages

Lightly trimming risk after the recent leg down in global rates

Attractive EM Spreads from a historical perspective

Past performance is not a reliable indicator of current or future performance.Source: JP Morgan, Vontobel Asset Management, as of 31.01.2020.

GFC: Global Financial Crisis.

Fed hiking cycleFed hiking cycle

18


Relative yields still attractive compared to DM

Past performance is no guide to current or future performance.Source: Vontobel Asset Management, JP Morgan, BofAML, 30.01.2020

0

50

100

150

200

250

300

350

400

450

500

550

600

650

700

750

800

850

900

31

/12

/201

2

31

/03

/201

3

30

/06

/201

3

30

/09

/201

3

31

/12

/201

3

31

/03

/201

4

30

/06

/201

4

30

/09

/201

4

31

/12

/201

4

31

/03

/201

5

30

/06

/201

5

30

/09

/201

5

31

/12

/201

5

31

/03

/201

6

30

/06

/201

6

30

/09

/201

6

31

/12

/201

6

31

/03

/201

7

30

/06

/201

7

30

/09

/201

7

31

/12

/201

7

31

/03

/201

8

30

/06

/201

8

30

/09

/201

8

31

/12

/201

8

31

/03

/201

9

30

/06

/201

9

30

/09

/201

9

31

/12

/201

9

Spread Evolution of various fixed income asset classes (to 31.01.2020)

EM Sov HY

EM Corps HY

US HY

EUR HY

EM Sov IG

EM Corp IG

US IG Corp

EUR IG Corp

Overview


Market Outlook


Conclusion

20


Isn’t EMC a “niche” asset class?

Few dedicated investors in the EM Corporates market -> amplified mispricings -> active managers’ paradise

Index vs. Market Size of EM HC Sovereign, EM HC Corporates and EM LC (in USD bn.)

1.137

1.072

1.269

16% 3% 7%0

200

400

600

800

1.000

1.200

1.400

EM HC Sovereign EM HC Corporate EM LC

Ma

rke

t S

ize

an

d A

uM

(in

bn

US

D)

Index Market Size* AuM in the Asset Category (in % of Market Size)**

*Market size of EM HC Sovereign is equivalent to the market capitalization of the J.P. Morgan EMBI Global Diversified. For EM HC Corporate this corresponds to

the market capitalization of the J.P. Morgan CEMBI Broad Diversified and for EM LC we consider the J.P. Morgan GBI-EM Global Diversified.

**AuM of the asset category is based on Morningstar’s classification.

Source: Vontobel Asset Management, Morningstar, Broadridge, J.P. Morgan, as of 30.11.2019.

21


There is «poor liquidity» in this asset class, correct?

…leads to larger/more liquid bonds…

43%

24% 33%

17%

22%

62%

0%

10%

20%

30%

40%

50%

60%

70%

< 300 MM 300-500MM 500MM+

Perc

en

tag

eo

f T

ota

l Is

su

an

ce

Vo

lum

e (

acro

ss issuance

siz

e)

Before 2008 After 2008

Asset class growth of EM Corporates…

Source: J.P. Morgan, as of November 2019 (l.h.s.). Calomiris et al., “Search for yield in large international corporate bonds: investor behavior and firm responses”,

as of June 2019 (u.r.h.s.). Vontobel Asset Management, as of January 2020 (r.h.s.).

408

490

582 7

84 9

61

1.1

27

1.0

41

1.1

10

1.2

61

1.3

74

1.4

83

197 2

19 2

79

323

419

507

621 7

04

815 7

87

896

0

500

1.000

1.500

2.000

2.500

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Bo

nd

sto

ck (

in U

SD

bn)

Investment Grade High Yield & Non-rated

Overview


Market Outlook


Conclusion

23


Conclusion: EM Corporates have all the attributes of an absolute return strategy!

High

Yield

Low

Duration

Low

Default Risk

Well

diversified

Low

Volatility

Limited

Drawdowns and

Performance

Convexity

Decorrelated

01 03 05 07

02 04 06

24


Disclaimer

This marketing document was produced for institutional clients, for

distribution in Argentina and Uruguay.

Important notice: This communication is for information purposes only and

nothing contained in this communication should constitute a solicitation, or

offer, or recommendation, to buy or sell any investment instruments, to effect

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25


Disclaimer

This marketing document was produced for institutional clients, for distribution in AT, CH,

DE, ES, FI, FR, GB, IT, LU, NL, NO, SE, SG (Professional Investors only).

This document is for information purposes only and does not constitute an offer,

solicitation or recommendation to buy or sell shares of the fund/fund units or any

investment instruments, to effect any transactions or to conclude any legal act of any

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In particular, we wish to draw your attention to the following risks: Investments in the

securities of emerging-market countries may exhibit considerable price volatility and – in

addition to the unpredictable social, political and economic environment – may also be

subject to general operating and regulatory conditions that differ from the standards

commonly found in industrialized countries. The currencies of emerging-market countries

may exhibit wider fluctuations. Investments in riskier, higher-yielding bonds are generally

considered to be more speculative in nature. These bonds carry a higher credit risk and

their prices are more volatile than bonds with superior credit ratings. There is also a

greater risk of losing the original investment and the associated income payments.

Investments in derivatives are often exposed to the risks associated with the underlying

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risk than direct investments. Investment universe may involve investments in countries

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Money market investments are associated with risks of a money market, such as interest

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Performance data does not take into account any commissions and costs charged when

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Deep dive into Emerging Markets Corporate Debt · the market capitalization of the J.P. Morgan...

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