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Emerging Market Debt

Eugene CHOI | Marzo 2017Senior Client Portfolio Manager

2 Emerging Market Debt

For professional investors onlyPictet Asset Management

Our views1.



2

4

2

6 6

3

6

1 7

0

2

4

6

8

10

12

14

16

18

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


-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



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



EMERGING MARKET PMI AND AUTOS, WHAT ARE THEY SAYING?

PMI for emerging economies


EM car sales growth (% y/y)


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



HAVE CURRENCIES CHEAPENED ENOUGH TO START RECOVERING?

EM currencies valuation relative to the US dollar and relative to the euro


-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



DO EMERGING MARKET CENTRAL BANKS HAVE ROOM TO EASE POLICY RATES?


Source: Pictet Asset Management, BIS, CEIC, Datastream

EM nominal policy rates GEM weighted-average CPI inflation rates


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



EMERGING LOCAL BOND YIELDS SPREAD AT A HISTORICAL HIGH, CAN THIS FALL?

EM local bond yields minus global average yields*


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)



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



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



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

%



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)



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)



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)



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



For more information,please contact

Disclaimer: This material is for distribution to professional investors only. However it is not intended for distribution to any person or entity who is a citizen or resident of any locality, state, country or other jurisdiction where such distribution, publication, or use would be contrary to law or regulation. Information used in the preparation of this document is based upon sources believed to be reliable, but no representation or warranty is given as to the accuracy or completeness of those sources. Any opinion, estimate or forecast may be changed at any time without prior warning. Investors should read the prospectus or offering memorandum before investing in any Pictet managed funds. Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future. Past performance is not a guide to future performance. The value of investments and the income from them can fall as well as rise and is not guaranteed. You may not get back the amount originally invested.

This document has been issued in Switzerland by Pictet Asset Management SA and in the rest of the world by Pictet Asset Management Limited, which is authorised and regulated by the Financial Conduct Authority, and may not be reproduced or distributed, either in part or in full, without their prior authorisation.

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