citywire october 2013

For investment professional use only – Not for public distribution

Aberdeen Emerging Market Debt

October 2013

Edwin Gutierrez, Portfolio Manager – Emerging Market Debt Aberdeen Asset Management

1

• Recent market trends

• The long term investment case

• Investment process and performance

Table of contents


2

Recent market trends

Emerging Market Debt

3

Rising US Treasury yields traditionally pose a challenge for EMD

EM sovereign spreads and US Treasury yields

Index changed from EMBI to EMBI+ from 31 Dec 97

Source: JP Morgan, Bloomberg, 30 Jun 13

0

500

1.000

1.500

2.000

2.500

0

1

2

3

4

5

6

7

8

9

gen 94 gen 96 gen 98 gen 00 gen 02 gen 04 gen 06 gen 08 gen 10 gen 12

Spread bps Yield % US 10yr Treasury yield (LHS) JPM EMBI/EMBI+ Index spread (RHS)

US 10 yr yield widened 115bps;

EMBI spread widened 295bps


EMBI+ spread widened 158bps


EMBI+ spread widened 125bps


4

EMD yields have adjusted with rising US Treasury yields

EM Local currency index: JPM GBI-EM GD, EM Hard currency index: JPM EMBI GD, EM Corporate index: JPM CEMBI BD

Source: JP Morgan, S&P, Bloomberg, 30 Aug 13

Yield (%)

0

2

4

6

8

10

12

14

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

(%) EM Local Currency (BBB+) EM Corporates (BBB) EM Hard Currency (BBB-) US 10yr (AA+)


5

EM corporate bonds outperformed sovereigns due to lower UST sensitivity

Source: JP Morgan, Bloomberg, 30 Jun 13

Index spreads (bps)

Aberdeen Global – Select Emerging Market Bond Fund

200

250

300

350

400

450

lug 12 ago 12 set 12 ott 12 nov 12 dic 12 gen 13 feb 13 mar 13 apr 13 mag 13 giu 13

JPM EMBI Global Diversified Index JPM CEMBI Broad Diversifed Index

6

%

The majority of losses YTD in local currency have been due to EM FX

Source: JP Morgan, 11 Sept 13

85

90

95

100

105

gen 13 feb 13 mar 13 apr 13 mag 13 giu 13 lug 13 ago 13 set 13

GBI-EM GD Total Return (in USD) GBI-EM Global Div Rates (Local Bond) Returns GBI-EM GD FX Return (USD)


7

Performance of stock markets in Q2 13 (MSCI total return )

Source: Aberdeen Asset Management, 30 Jun 13

Foreign outflows from equity markets weigh on currencies

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

Ch

ina

Ho

ng K

on

g

India

Indon

esia

Kore

a

Ma

laysia

Phili

ppin

es

Sri L

anka

Taiw

an

Tha

iland

Czech R

epu

blic

Hu

nga

ry

Pola

nd

Ru

ssia

South

Afr

ica

Turk

ey

Arg

entina

Bra

zil

Ch

ile

Co

lom

bia

Me

xic

o

Peru

Local Currency USD


8

The long term investment case


9

EMD countries will be the main drivers of future growth


2010

Source: Citi Mar 11; GDP measured in 2010 PPP USD

With a growing, financially independent,

aspirational middle class

2050f

North

America

22%

Europe

23%

Other

9%

Japan

6%

Emerging

Markets

40%

Europe

9%

Japan

2% Emerging

Markets

69%

Other

9%

North

America

11%

10

EM economies have considerably lower debt levels than in the DM world


General Government Debt (% GDP) vs Government Balance (% GDP)

Belgium

France

Germany

Greece

Ireland

Italy

Luxembourg

Netherlands

Portugal

Slovak Republic

Slovenia

Spain

Australia

Canada

Norway

Sweden

Switzerland

UK

USA

China

India

Indonesia

Korea

Malaysia

Philippines Thailand Vietnam Belarus

Croatia

Egypt

Georgia

Hungary

Iraq

Ivory Coast

Jordan

Kazakhstan

Latvia

Lebanon

Lithuania

Namibia

Poland

Qatar Romania

Russia Saudi Arabia

Senegal

Serbia

South Africa Turkey

UAE

Ukraine

Argentina

Barbados

Brazil

Chile

Colombia Costa Rica Dominican Republic

Ecuador

El Salvador

Guatemala

Jamaica

Mexico

Panama

Peru

Uruguay

Venezuela

0

10

20

30

40

50

60

70

80

90

100

110

120

130

140

150

160

-11 -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

Eurozone G10 Asia CEEMEA LatAmJapan

Developed countries

Emerging countries

General Government Balance for 2012 (% of GDP)

Gro

ss G

enera

l G

overn

ment D

ebt f

or

2012 (

% o

f G

DP

)

Japan's Govt. Debt is 236%

Source: IMF, World Economic Outlook Database, May 12

11

International reserves (as % of GDP)

Sovereign balance sheets are much stronger than they were 10 years ago

Source: World Bank, Jul 13

0

5

10

15

20

25

30

35

40

45

Brazil China Mexico Peru Russia South Korea

% 2002 2012


12

Net external debt

… and debt levels have improved dramatically

Data covers 40 major EM economies

Source: Emerging Advisors Group, Jul 13

Public debt

70%

60%

50%

40%

20%

10%

0%

1970 1980 1990 2000 2010

30%

Gross public debt (% of GDP)

60%

50%

40%

20%

10%

0%

1970 1980 1990 2000 2010

30%

Net external debt (% of GDP)


13

Foreign Direct Investment (US$bn)

FDI inflows remain robust

Source: Bloomberg, 31 Dec 12

0

20

40

60

80

100

120

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

India Brazil China


14

Real yields are increasingly compelling relative to developed markets

Source: S&P Local Currency Debt Rating, Bloomberg, 30 Aug 13

Country 10 year bond yield (%) Inflation y-o-y (%) Real yield (%) Credit rating (S&P)*

Brazil 11.7 6.3 5.4 A-

Nigeria 13.6 8.7 4.9 BB-

Hungary 6.6 1.8 4.8 BB

Colombia 5.8 2.2 3.6 BBB+

Poland 4.5 1.1 3.4 A

Mexico 6.8 3.5 3.3 A-

Peru 6.0 3.2 2.7 A-

South Africa 8.2 6.3 1.9 A-

US 2.8 2.0 0.8 AA+

Germany 1.8 1.5 0.3 AAA

Japan 0.7 0.7 0.0 AA-

UK 2.7 2.8 -0.1 AAA


15

Breakdown of CEMBI Broad

Diversified $ Index

69% investment grade,

average rating BBB

AAA 0%

AA 7%

A 26%

BBB 36%

BB 15%

B 10%

C 1%

NR 5%

Breakdown of GBI-EM Global

Diversified LC Index


average rating BBB+

AA 0%

A 57%

BBB 26%

BB 17%

Breakdown of EMBI Global

Diversified $ Index


average rating BBB-

AA 4% A

8%

BBB 47%

BB 23%

B 17%

C 0%

NR 1%

… for investment grade credit quality


Source: JP Morgan, Mar 13

16

• Institutional investors remain structurally underweight and will continue to look to EM bonds to diversify their

exposure away from core developed bond markets

Institutional inflows should support EMD markets over the long term


Source: Morgan Stanley, 3 Jan 13

Global diversified portfolio exposure to EM (% total)

1,7

3,9

4,5

5,0

0

1

2

3

4

5

6

7

8

9

10

US Europe

EM debt EM equity

17

Emerging market valuations reflect significant pessimism

% of Global fund managers who are overweight emerging market equities Source: BofA Merrill Lynch

Fund Manager Survey, Aug 13

60

45

30

15

0

-15

-30

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Lowest since Nov 01


18

• In the short term, we expect further volatility as investors continue to focus on the pace of US interest rate

normalisation

• EMD valuations have adjusted in response to the move in US Treasuries, but sovereign balance sheets are in much

better shape than in previous sell-offs and default risk remains low, making valuations appear more attractive

• The divergence between DM and EM growth is likely to narrow in the short term, but will remain structurally

pronounced

• Chinese growth remains at risk in the near term as the new administration attempts to address the excesses in the

shadow banking and real estate sectors; but in the long term these efforts will put the Chinese economy on a more

solid footing

• Countries with sizeable current account deficits and commodity exporters linked to Chinese investment and may

remain under pressure

• Structural redeployment by institutional investors away from developed bond markets will continue to ensure inflows

into EM bond markets over the long term

EMD outlook


19

Investment process and performance


20

Five steps to delivering alpha

Leaving nothing to chance


Risk Framework

Portfolio

Relative value

Scenario forecasts

Gauging Market dynamics

Fundamental research

21

Portfolio construction and risk parameters


* These are tactical guidelines the Investment Manager intends to follow as at the date of this

document and are subject to change at the Investment Manager's sole discretion. Investors should

always refer to our funds’ investment objectives and restrictions as stated in the latest prospectus Building diversified portfolios

Sample portfolio guidelines*

Country Maximum exposure per country: 20%, Smaller countries: 2%

Currency Total exposure: 25%, Individual currency: 5%

Corporate Total exposure: 20%, Individual issuer: 1%

Diversification Minimum 25 countries

Corporates Currencies Hard currency

sovereigns

Local currency

sovereigns

Pool of investment opportunities with attractive risk return characteristics

Risk factors Duration, exposure to high yielding issuers/sensitivity to commodity prices

Correlation, beta exposures, tracking error and VaR analysis

22

Summary


1. EMD Plus Strategy

Inception: 1 Aug 99

Benchmark: JPM EMBI Global Div.

Source: Aberdeen Asset Management. Total return, gross of fees in USD, 31 Aug 13

Generating intelligent alpha

Annualised performance1

YTD 1 year 3 years 5 years Since inception

Composite -7,86 -2,28 6,60 9,22 15,21

Benchmark -9,04 -4,98 4,59 7,69 10,46

-15

-10

-5

0

5

10

15

20

• Successful, well-resourced, stable team with deep experience

• Recognised emerging markets specialist in both debt and equity

• Long established network across emerging market countries

• Exploiting opportunities through extensive research

• Size ensures investment flexibility

Risk statistics 3 years

Tracking error (%) 2.38

Information ratio 0.84

Sharpe ratio 0.73

23

Past performance is not a guide to future returns. The value of investments, and the income from them, can go down

as well as up and your clients may get back less than the amount invested.

The views expressed in this presentation should not be construed as advice on how to construct a portfolio or whether

to buy, retain or sell a particular investment. The information contained in the presentation is for exclusive use by

professional customers/eligible counterparties (ECPs) and not the general public. The information is being given only

to those persons who have received this document directly from Aberdeen Asset Management (AAM) and must not be

acted or relied upon by persons receiving a copy of this document other than directly from AAM. No part of this

document may be copied or duplicated in any form or by any means or redistributed without the written consent of

AAM.

The information contained herein including any expressions of opinion or forecast have been obtained from or is based

upon sources believed by us to be reliable but is not guaranteed as to the accuracy or completeness.

Issued by Aberdeen Asset Managers Limited which is authorised and regulated by the Financial Conduct Authority in

the United Kingdom. Registered in Scotland No.108419. Registered Office: 10 Queen’s Terrace, Aberdeen, AB10 1YG.

For investment professional use only Not for public distribution


citywire october 2013

Economy & Finance

gdp emerging market

emerging markets

emerging market bond

em fx source

lower debt levels

gross public debt

net external debt

em corporate index