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EMERGING MARKETS DEBT. Knight Capital - June 30 th 2011. Alfredo Viegas 203-930-7180. Low ($975 or less) Lower middle ($976 - $3,855) Upper middle ($3,856 - $11,905). No Data High ($11,906 or more). Emerging Markets Debt – Geography What is an “Emerging Market Country?”. - PowerPoint PPT Presentation

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  • EMERGING MARKETS DEBTKnight Capital - June 30th 2011 Alfredo Viegas 203-930-7180

  • No hard definition or rule

    World Bank definition: a country with a gross national income per head between $975 and $11,905*

    50 countries in the broader benchmarks**Source: * World Bank, as of June 2010 **S&P Investable and S&P Frontier benchmarks combinedWorld GNI per capitaGNI Per Capita 2008*Emerging Markets Debt Geography What is an Emerging Market Country?*

  • Source: BofA Merrill Lynch Global Equity Strategy, BP, CIA World Factbook, IMF World Economic Outlook, MSCI, as of June 2010Emerging Markets already importantEmerging Markets Debt Present day Emerging Markets are important*

  • Once upon a time We may take the current world environment as status quo but that is a mistake. Economies Rise & Fall Global economic leadership is expected to look very different in 40 years Emerging Markets Debt History and Future Times change and Economies Rise and Fall*

  • Too important to ignore (84% of worlds population, 23% of worlds GNI)*Strong growth relative to developed economiesDiversification advantagesPremium returns achieved as economies emergeEconomic / market developments reduce risk of crisesEmerging Markets Debt Why Invest? Too Important to ignore*

  • *Source: Schroders as of December 2009Countries are mentioned for illustrative purposes only and should not be viewed as a recommendation to buy/sell.

    MaturityTimeSub-Saharan AfricaIndiaChinaEgyptBrazilMalaysiaMexicoCzech/Hungary/PolandS. KoreaIsraelTaiwanHong Kong/SingaporeG7Frontier markets deregulationEmerging markets Premium growth (5%-7%)Established growth(3%-5%)Mature economies(2%-3%)RussiaEmerging economies characterized by strong economic growthEmerging Markets Debt Why Invest? Thats where the growth is! *

  • Source: UBS estimates, IMF, Haver, CEIC. Data as of January 2011Countries are mentioned for illustrative purposes only and should not be viewed as a recommendation to buy/sell.The data includes some forecasted views. We believe that we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. There is no guarantee that any forecasts or opinions will be realized. GDP growth has come from Emerging and Frontiers markets not DevelopedCumulative change in USD GDP, 2000-2010E (%)Emerging Markets Debt Why Invest? Emerging Market Economies have had extraordinary growthEmerging MarketsFrontiersDeveloped*

  • Emerging Markets Debt Growth to continue? This is the chart that should really scare youHourly Labor Costs in US$, 2010Source: EIU estimates, as of June 2010Countries are mentioned for illustrative purposes only and should not be viewed as a recommendation to buy/sell.

    Low labor costs*

  • 2011(F) contribution to real GDP growth for major emerging marketsEmerging Markets growth expected to continue to be internally driven%Source: JP Morgan, Economics Team estimates, as of October 2010The data includes some forecasted views. We believe that we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. There is no guarantee that any forecasts or opinions will be realized.Countries are mentioned for illustrative purposes only and should not be viewed as a recommendation to buy/sell.Emerging Markets Debt Growth to continue? The growth should start shifting to internal consumption*

  • Source: Euromonitor, Morgan Stanley Research. As of December 2010The data includes some forecasted views. We believe that we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. There is no guarantee that any forecasts or opinions will be realized.Countries are mentioned for illustrative purposes only and should not be viewed as a recommendation to buy/sell.BRIC - Household Disposable Income over US$10,000 (Millions)BRICs consumer has become a driving force in the global economyEmerging Markets Debt Growth to continue? The growth should start shifting to internal consumption*

  • Monthly motor vehicle sales (millions) Emerging consumers more important than developed consumersPenetration rate / consumption per capita, China as % of world averageGDP per capita (PPP):China = 57% of world Avg.Emerging Markets Debt Growth to continue? The growth should start shifting to internal consumption*

  • Socialization of Private Debts is an uncertain strategySovereign Policy is fully in experimental stage -- we think this suggests Sovereign UNDERPERFORMANCE *Emerging Markets Debt EMs got their sh!t together Medium term: core imbalances remain and policy responses remain unorthodoxPolitical Imperative remains to kick the can to the next guy

  • Emerging Markets Debt 2011 EM a safe haven This Time it IS Different Deficits, Unsustainable Debt & Demographics*Advanced and Emerging Economies: Cyclically Adjusted Primary Balance (CAPB), Primary Balance (PB), and Government Debt, 200714(In percent of GDP)Advanced economies face large primary deficits even adjusting for the cycleDebt and deficit problems are centered in the advanced economiesPrimary balances (ex interest expense) are forecasted to remain negative and continue to increase debt accumulation Source: IMF

  • Emerging Markets Debt Fiscal sanity Emerging Market Countries do not have the debt hangover problemPrivate and public sector debt/GDP % of GDPEmerging economies generally have very low levels of debtSource: ING. Data to December 2009 Countries mentioned are shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. *

  • Household debt as a % of GDPLatin America 13.4%Emerging Europe 28.8%Mature Markets 85.6%Emerging Asia 32.4%Source: Morgan Stanley as of April 2010Data to December 2009. Countries mentioned are shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell.Emerging economies never took on debt the way developed markets didEmerging Markets Debt Fiscal sanity Households in Emerging Markets also hold much less debt*

  • % of Population over 65EU-27 Dependency Ratio is worrisomePopulation demographics in the G-7 are very unfavorable, distinctly different from post WW2 when demographic trends were positiveThe number of people 65 or older will increase by 90% by 2035, to 20% of the populationBy 2060 the problem in developed economies, such as the EU-27 will be particularly worrisomeEmerging Markets Debt 2011 an inflection year? This Time it IS Different Difficult Demographics*

  • Resources and demographics% Worlds totalSource: CSIS and World Economic OutlookThe opinions stated in this presentation include some forecasted views. We believe that we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee that any forecasts or opinions will be realized.Percentage of population over retirement age%Long term prospects are favorable to Emerging MarketsEmerging Markets Debt Demographics & Resources Unlike the Developed world*

  • Emerging Markets Debt 2011 G-7 debt spiral? This Time it IS Different Destructive Debt Dynamics*Unprecedented adjustments are required across the G-7The status quo is not an optionUnder current and future pressures on public finances public debt would spiral out of control in the absence of meaningful fiscal adjustmentGeneral Government Net Debt Scenario Under 2010 Policies(In percent of GDP)Source: IMFThese figures DO NOT INCLUDE entitlements!

  • Emerging Markets weighting in MSCI All Country World Index ( ~ $40 Trillion)Source: MSCI Barra Research. Data to December 31, 2010Emerging Markets weighting has increased significantly over recent years over $7 TrillionEmerging Markets Debt The Equities story This has become rather well known by now*

  • Global economy (Share of GDP)21Source: Factset, MSCI, data shown for December 2009 using MSCI World and MSCI EM indices (MSCI AC World)2Source: Goldman Sachs, Global Economics Paper No:204 as of September 20103Source: IMF, Factset, MSCI, data shown for 2009Countries are mentioned for illustrative purposes only and should not be viewed as a recommendation to buy/sell.Ratio of market capitalization to GDP3Global stock markets1Capitalization/GDP (Dec 09)GDP Per capita (09)AustraliaUKJapanGermanyEmerging MarketsCanadaUSEmerging Market stock markets under-represented relative to size of economies(19% by 2011 and 31% by 2030)(49% by 2011 and 59% by 2030)Emerging Markets Debt The Equities story But it is still by no means finished growing*

  • Performance (Net US$) %MSCI Emerging Markets Index Performance 2001-2010Source: Factset, Performance Net TR (US$), as of December 2010Performance shown is past performance. Past performance is not necessarily a guide to future performance. The value of investment can go down as well as up and is not guaranteed.Annual Returns Net (TR) US$Outperformed in 9 out of the last 10 yearsEmerging Markets Debt The Equities story Nevertheless it has had a good run over the past 10 years.*

    MSCI EMMSCI World MSCI EM versus MSCI World2001-2.6%-16.8%+14.2%2002-6.2%-19.9%+13.7%2003+55.8%+33.1%+22.7%2004+25.6%+14.7%+10.9%2005+34.0%+9.5%+24.5%2006+32.2%+20.1%+12.1%2007+39.4%+9.0%+30.4%2008-53.3%-40.7%-12.6%2009+78.5%+30.0%+48.5%2010+18.9%+11.8%+7.1%2001-2010+337.0%+25.6%+311.4%

  • Emerging Markets External Debt 2010 Record Year WALL OF MONEY IFC says $825Bn in 2010 2011 to exceed $1T ? EM Equity in the 5th inning EM Debt in the 2nd inning ? Global EM equity allocation = 6% - according to GS => 18% which means $4T EM Debt allocation over $6T according to EPFR in 2010

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