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Emerging Market Debt
Eugene CHOI | Marzo 2017Senior Client Portfolio Manager
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Our views1.
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2
4
2
6 6
3
6
1 7
0
2
4
6
8
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14
16
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1991 1992 1996 1998 2001 2003 2008 2012
QUARTERS WITH GDP GROWTH UNDER POTENTIAL
EMERGING MARKET NEGATIVE GROWTH GAP, WILL THIS START REVERSING?
EM growth gap: realised minus potential GDP growth
Source: Pictet Asset Management, CEIC, Datastream
EM: number of quarters with negative growth gap
Source: Pictet Asset Management, CEIC, Datastream
-7.0
-6.0
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
91 93 95 97 99 01 03 05 07 09 11 13 15 17
%
GDP GROWTH DEVIATION FROM POTENTIAL
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EMERGING MARKET GROWTH, ARE WE SEEING STABILISATION?
Emerging real exports, retail sales and real GDP growth
Source: Pictet Asset Management, BIS, CEIC, Datastream, as at 24.01.2017
-0.9
3.9
4.6
-12
-7
-2
3
8
13
-30
-20
-10
0
10
20
30
40
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
% Y/
Y, 3m
ma
% Y/
Y, 3m
ma
NOMINAL EXPORTS (L.S.) REAL GDP (R.S.) REAL RETAIL SALES (R.S.)
EM crisisTequila crisis
EM crisisAsian crisis
Developed crisisGreat recession
Developed crisisEuro debt crisis
Developed crashTech bubble
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EMERGING MARKET PMI AND AUTOS, WHAT ARE THEY SAYING?
PMI for emerging economies
Source: Pictet Asset Management, CEIC, Datastream
EM car sales growth (% y/y)
Source: Pictet Asset Management, CEIC, Datastream
4 8 .0
4 8 .5
4 9 .0
4 9 .5
5 0 .0
5 0 .5
5 1 .0
5 1 .5
DEC-
14
FEB-
15
APR-
15
JUN-
15
AUG-
15
OCT-
15
DEC-
15
FEB-
16
APR-
16
JUN-
16
AUG-
16
OCT-
16
DEC-
16
EMERGI NG PMI * THRESHOLD
* 16 Manufacturing PMIs GDP weighted
-30
-10
10
30
50
70
04 05 06 07 08 09 10 11 12 13 14 15 16 17%
Y/Y,
3mma
EM EM MANUFACTURERS EM COMMODITY
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HAVE CURRENCIES CHEAPENED ENOUGH TO START RECOVERING?
EM currencies valuation relative to the US dollar and relative to the euro
Source: Pictet Asset Management, BIS, CEIC, Datastream, as at 24.01.2017
-30.8
-2.4
-40
-30
-20
-10
0
10
20
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16
%
VERSUS DOLLAR VERSUS EURO +/- 1 ST. DEV. +/- 2 & 3 ST. DEV.
EM FX overvalued
EM FX undervalued
As of January 12, 2016
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DO EMERGING MARKET CENTRAL BANKS HAVE ROOM TO EASE POLICY RATES?
Source: Pictet Asset Management, BIS, CEIC, Datastream, as at 24.01.2017
Source: Pictet Asset Management, BIS, CEIC, Datastream
EM nominal policy rates GEM weighted-average CPI inflation rates
Source: Pictet Asset Management, BIS, CEIC, Datastream
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17%
Y/Y
GLOBAL EMERGING COUNTRIES LAST2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
10 11 12 13 14 15 16 17
%
EM POLICY RATE*
EM MANUFACTURING POLICY RATE
EM COMMODITY POLICY RATE
* unweighted average of 28 emerging economies (ex-Ukraine, Argentina & Venezuela)
-60bps
+170ps
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EMERGING LOCAL BOND YIELDS SPREAD AT A HISTORICAL HIGH, CAN THIS FALL?
EM local bond yields minus global average yields*
Source: Pictet Asset Management, BIS, CEIC, Datastream
1 .5
2 .0
2 .5
3 .0
3 .5
4 .0
4 .5
5 .0
5 .5
6 .0
6 .5
0 3 0 4 0 5 0 6 0 7 0 8 0 9 1 0 1 1 1 2 1 3 1 4 1 5 1 6 1 7
%
EM LOCAL BOND YI ELDS - DM BOND YI ELDS*
AVERAGE
+/- 2 STANDARD DEVI ATI ONS
* JPM global diversif ied (EM global sovereign in local currency) minus JPM GBI (DM global sovereign)
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2 .0 %
3 .0 %
2 .5 %
3 .0 %
1 .0 %
2 .0 %
1 .5 %
3 .0 % 3 .0 % 3 .0 %
2 .0 % 2 .0 % 2 .0 %
1 .0 %
6 .0 %
5 .0 %
3 .5 %
5 .0 %
4 .0 % 4 .0 %
3 .5 % 4 .0 %
6 .0 %
7 .0 %
6 .0 %
4 .0 %4 .0 %
4 .0 %
3 .0 %
0%
1%
2%
3%
4%
5%
6%
7%
8%
INDI
A
INDO
NESI
A
MALA
YSIA
PHIL
IPPI
NES
THAI
LAND
HUNG
ARY
POLA
ND
RUSS
IA
SOUT
H AF
RICA
TURK
EY
BRAZ
IL
CHIL
E
COLO
MBIA
MEXI
CO
PERU
% C
PI In
flatio
n YoY
Plus
Targe
t Ran
ge
LATEST YOY INFLATION % TARGET RANGE LOW TARGET RANGE HIGH
EM INFLATION RATES – WHAT WILL CENTRAL BANKS DO?
Latest year-on-year inflation (%) and central bank target inflation range
Source: Pictet Asset Management, 31.01.2017
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WHAT’S PRICED IN THE MARKET
12-month market implied policy rates
Source: Pictet Asset Management, BaML, 16.02.2017
1 0 5
5 4
2 8 2 41 4 1 0 7 4 4 2 0
-3 2
-1 3 6
-3 2 6-350
-300
-250
-200
-150
-100
-50
0
50
100
150
MEXICO HUNGARY MALAYSIA POLAND ISRAEL TAIWAN CZECH THAILAND KOREA S AFRICA TURKEY CHILE COLOMBIA BRAZIL
bos
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HARD CURRENCY DEBT – DETERIORATION IN CREDIT RATINGS
Source: JP Morgan EMBI Global Diversified , data as at 31.01.2017
JP Morgan EMBI Global Diversified investment grade evolution (%)
0
10
20
30
40
50
60
70
80
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
%
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DEGREE OF OPENNESS OF EMERGING ECONOMIES
Source: Pictet Asset Management, 31.01.2017
Exports and imports as a percentage to GDP
0
50
100
150
200
250
VENE
ZUEL
A
ARGE
NTIN
A
BRAZ
IL
PAKI
STAN
TAIW
AN
EGYP
T
COLO
MBI
A
INDO
NESI
A
CHIN
A
PERU
INDI
A
TURK
EY
RUSS
IA
PHIL
IPPI
NES
ISRA
EL
CHIL
E
SOUT
H AF
RICA
MEX
ICO
ROM
ANIA
KORE
A
POLA
ND
CROA
TIA
UKRA
INE
BULG
ARIA
THAI
LAND
MAL
AYSI
A
CZEC
H RE
PUBL
IC
VIET
NAM
HUNG
ARY
SING
APOR
E
HONG
KON
G
%GD
P
TRADE (EXPORTS & I MPORTS AVG)
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HARD CURRENCY DEBT –THE RELATIONSHIP WITH US TREASURIES
Source: Bloomberg, JP Morgan EMBI Global Diversified , data as at 31.01.2017
JP Morgan EMBI GD spread vs 10 year US Treasuries
150
250
350
450
550
650
750
850
0
1
2
3
4
5
6
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
U.S. 10yr Yield (LHS) EMBI GD Spread (RHS)
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340
201
517
81 85 111 14
615
215
515
515
616
817
719
219
2 225
230
230
232
237
243
263
268
271
275
282
293
316
327
328 38
638
640
040
040
941
2 452
478
499
500
505
663
688
705
722
743 78
4
0
200
400
600
800
1000
1200
EM
BI
GD
INV
ES
TM
EN
…B
ELO
W B
BB
LIT
HU
AN
IAP
OLA
ND
TH
E …
IND
IAH
UN
GA
RY
CH
INA
PE
RU
RO
MA
NIA
PA
NA
MA
CH
ILE
MA
LAY
SIA
MO
RO
CC
OR
US
SIA
UR
UG
UA
YC
RO
AT
IAIN
DO
NE
SIA
CO
LOM
BIA
SE
RB
IAT
RIN
IDA
D …
PA
RA
GU
AY
OM
AN
KA
ZA
KH
ST
AN
SO
UT
H …
ME
XIC
OB
RA
ZIL
TU
RK
EY
AZ
ER
BA
IJA
ND
OM
INIC
AN
…JA
MA
ICA
SR
I LA
NK
AIV
OR
Y C
OA
ST
CO
ST
A R
ICA
PA
KIS
TA
NA
RG
EN
TIN
AE
L S
ALV
AD
OR
KE
NY
ALE
BA
NO
NE
GY
PT
MO
NG
OLI
AU
KR
AIN
EG
HA
NA
ZA
MB
IAE
CU
AD
OR
AN
GO
LAV
EN
EZ
UE
LA
SP
RE
AD
OV
ER
US
TR
EA
SU
RIE
S (
BP
S)
HARD CURRENCY DEBT – WIDE OPPORTUNITY SET
Highly speculative
Idiosyncratic opportunities, fundamentals a key driver
Close correlation to US Treasuries, limited opportunities given
transaction costs
Source: JP Morgan EMBI Global Diversified , data as at 31.10.2016. Countries less than 0.5% of index not shown.
JP Morgan EMBI GD spread by country (bps)
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DESPITE A CHALLENGING OUTLOOK, THE LONG-TERM CASE REMAINS
− Low yields
− Unorthodox and unpredictable monetary policy
− Nervousness around political changes
− Undervalued currencies
− Sovereign bonds with attractive yields of ~6.6%
− Diversification in economic and monetary policy cycles
EM Hard Currency
Debt
EM Local Currency
Debt
Developed Market Fixed
Income
− No direct currency risk
− Sovereign bonds with attractive yields of ~5.6%
− Over 65 countries providing a wide range of opportunities
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