Emerging-markets : Here and beyond

“Travel makes one modest. You see what a tiny place you occupy in the world.” Gustave Flaubert

Although the U.S. is embarking on a gradual path toward higher Furthermore, yields for emerging-markets debt are attractive relative to rates, low and even negative yields continue to proliferate across other types of fixed income, and a number of central still have enough much of the developed world. As a result, fixed-income investors who flexibility to cut interest rates if further economic stimulus is needed. normally stick close to home are searching far and wide to find ways We invite you to travel with us on an adventure to see the world of of generating additional income in their portfolios. As investors leave emerging-markets debt. Our itinerary includes a look at the history of the their tiny place in the world to discover new opportunities, emerging asset class, followed by a journey to the different regions that comprise markets have increasingly become a preferred destination. While on first the emerging markets. We will also learn about key themes and risks that glance emerging-markets debt may seem a world away from where the should be considered, as well as the various components of the emerging- traditional fixed-income investor has typically visited, this asset class has markets debt universe and how they can be used within a portfolio. much to offer in terms of diverse markets and issuers, and can provide portfolios with the potential for both yield and diversification.1 Off we go! There are many reasons why emerging markets remain a bright spot amid the many uncertainties surrounding the global economy as a whole. Economic growth is mounting a gradual recovery, and large numbers of young workers are fueling consumer demand. Governments are generally stable with manageable amounts of debt.

1 Diversification does not ensure a profit or protect against a loss in a declining market.

01 of 12 Emerging-markets debt: Here and beyond Chapter 1: Starting off: a history of emerging-markets debt

Starting a new journey often involves learning from where we’ve already The Brady Plan, named for U.S. Treasury Secretary Nicholas Brady and been. The history of what is now known as emerging-markets debt began introduced in 1989, sought to provide for emerging nations in the 1970s, when multinational banks in Europe and the U.S. lent in exchange for adopting significant reforms, so that these nations money directly to governments in emerging markets, particularly in Latin could improve their tenuous financial positions and regain access to America. This was known as lesser developed countries, or LDC, . international capital markets for financing. The principles of the Brady Plan were based on what was already used for debt forgiveness among At the time, there was no secondary market. Therefore, lenders found U.S. corporations and their creditors, including: themselves unable to decrease their exposure to these loans when problems arose. For example, soaring oil prices, high interest rates • offering to reduce the debt in exchange for greater assurance of being and inflation in the double digits in the late 1970s and early 1980s paid back principal and interest; contributed to a financial crisis in in 1982, when a number • basing debt relief on whether or not economic reforms were made; and of countries were unable to make their debt payments. , for • making the new securities easier to trade in order to disperse the risk to example, placed a moratorium on paying interest on its loans, and many other investors, instead of it being concentrated with one lender. other nations followed its lead, leaving lenders with non-performing assets on their balance sheets. As a result of the Brady Plan, emerging nations A secondary market was established as banks began swapping their loans were able to reduce their debt burdens through with one another in exchange for loans in other countries, and in other cases selling the loans they had to other entities in order to reduce their negotiations with lenders while also establishing risk exposure. In 1983 and 1984, a small group of traders began acting as more market-friendly economic policies and intermediaries between the buyers and sellers of these investments. programs to enhance their credit profiles. In 1985, U.S. Treasury Secretary James Baker created a program where $9 billion from multilateral agencies and $20 billion from commercial banks New securities were issued with principal and rolling interest payments was promised to recipients who would in turn adopt more market-friendly collateralized by zero-coupon U.S. Treasuries, which were bought with reforms, such as privatizing state-owned enterprises, reducing trade proceeds from loans provided by the World and the International barriers and deregulating investments. But this plan fell short of helping Monetary Fund (IMF). As a result of the Brady Plan, emerging nations LDC nations grow their way out of the debt they had accumulated. were able to reduce their debt burdens through negotiations with lenders while also establishing more market-friendly economic policies and In 1986 and 1987, countries such as Chile and Mexico adopted debt-for- programs to enhance their credit profiles. At the same time, commercial equity plans, where debt holders could exchange the debt for equity in state- banks were able to reduce the risks they faced holding LDC loans by owned companies. Trading became easier as more banks looked to sell their engaging with an expanded investor community through the use of the loans for less than their face value after increasing their loss reserves. new standardized securities. The Brady Plan Symbolic of the move away from emerging markets’ volatile past, nearly the entire stock of Brady bonds, peaking at US$150 billion in 1994, was Historically, LDC loans were restructured and payments rescheduled on retired in 2006 during a period of marked improvement in sovereign a case-by-case basis if a borrower had trouble paying back the . The credit ratings. This shifted the bulk of their debt financing to their idea was that when these LDC economies recovered, the problems with respective local currency markets. The retirement of the remaining Brady debt payments would vanish. Unfortunately, this idea never became a bonds also marked a definitive shift from the dominance of hard currency reality, even after numerous rounds of debt restructuring took place, and debt to a more widespread issuance of local currency debt, while reducing countries generally were in no better position to repay their debt than the credit risk of investment-grade hard currency sovereign debt. they were in the first place.

02 of 12 Emerging-markets debt: Here and beyond Chapter 2: You are here

Until relatively recently, emerging-markets debt represented only a small Additionally, credit quality has evolved and improved since the early days part of the market universe. Primary issuance was limited, credit of the asset class. Defaults are low despite emerging-markets issuers quality was often poor, markets were generally illiquid and crises were often being portrayed as the more likely candidates to on their more common than not. Essentially, political, social and economic turmoil debt repayments. In local currency debt, no country has defaulted on a overshadowed any investment potential that lay within emerging countries. bond issued in its own currency since Russia in 1998. And although they are viewed as being similar in terms of how risky they are, default rates Today, however, emerging nations are home to some of the most dynamic for emerging-markets corporate debt are relatively lower than default growth opportunities. Relative to their developed-world counterparts, rates for U.S. high-yield bonds. This trend is expected to continue into they offer greater capacity for economic growth; the IMF recently 2017. forecasted 2016 gross domestic product (GDP) growth of 4.1%, rising to 4.6% in 2017.2 It’s some way off the growth of 6% to 7% that emerging Global conditions have become increasingly supportive in recent times markets experienced at the beginning of the century, but it’s a far cry from after several years of sporadic volatility. While the U.S. Federal Reserve the paltry growth forecast of 1.6% for developed markets in 2017. (Fed) has begun a gradual path of interest-rate hikes, the lower-for- longer central bank environment elsewhere in the developed world There is still a lot of work to be done, and risks has seen investors move into the asset class in the hunt for attractive remain, but investing in emerging-markets debt yields. China continues its orderly rebalancing of its economy, while macro fundamentals across emerging markets continue to show signs today is not the risk it once was. of stabilizing. Valuations also remain attractive relative to their credit fundamentals, especially when compared against the negative yields in As these nations have grown and developed, so too has emerging- many developed markets. markets debt as an asset class. It now stands at an impressive $10.3 trillion (as of December 31, 2016). Market commentators may have Uncertainties surrounding policies under U.S. President Donald Trump painted a negative picture of emerging-markets debt over the last few could pose a risk for emerging markets, particularly if large trade tariffs years, but performance for 2016 was surprisingly strong, highlighting the are imposed on China and Mexico. Rising U.S. Treasury yields from fiscal resilience of these economies. There is still a lot of work to be done, and stimulus could also provide headwinds for emerging-markets debt, but risks remain, but investing in emerging-markets debt today is not the risk the prospect of higher yields in the latter will likely appeal to income- it once was. sensitive investors. Many emerging nations have built up large foreign exchange reserves while undergoing substantial monetary and fiscal adjustment. Policymakers are now able to control inflation more easily when currencies weaken, ultimately helping to restore competitiveness. Nowhere is this more evident than in current account balances where deficits have narrowed. Additionally, many emerging-markets central banks continue to garner institutional credibility among international investors thanks to their mature and conformist approach to monetary policy.

2 Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed and actual events or results may differ materially.

03 of 12 Chapter 3: A global journey

Half-formed travel plans, language barriers and the strangeness of foreign All of these factors put emerging markets on the path of gradual recovery. terrain haven’t stopped many people from trekking to new destinations. Emerging markets can offer compelling long-term growth, though it isn’t What’s been keeping investors from venturing into emerging markets? always easy to chart where the opportunities lie within emerging-markets debt given the vast diversity and complexity of its issuers. Emerging In the past few years, emerging markets saw a decline in popularity markets are typically found within the following three regions: following greater volatility, influenced in part by economic policies that were largely hard to predict along with renewed political risk. Now a Asia different tilt may benefit emerging markets. Events in the developed Asia remains the fastest growing region in the world. Recent numbers world such as Brexit and low interest rates have sent investors on a from the Purchasing Managers’ Index (PMI) surveys have been reassuring search for income and growth elsewhere.Despite continued global for many emerging-markets countries, especially in emerging Asia. uncertainty, emerging markets fundamentals remain sound. Improved trends in export growth could help emerging-markets countries regain their footing. Despite continued global uncertainty, emerging markets fundamentals remain sound. Levels of emerging-markets debt remained attractive as Structural reforms can help rebalance demand current account deficits narrowed. Policymakers worked hard to control inflation when currencies weakened. Many central banks are now in a and supply while reducing vulnerabilities and better position to cut interest rates, which could restart growth and help increasing economic efficiency. offset the impact from further rate hikes by the Fed. Consumer demand in the region has also increased in tandem with a growing middle class. Pushing ahead with high-impact reforms, including state-owned enterprise reform in China, will be critical to ensuring Asia’s position on Aberdeen central bank forecasts vs. market expectations the global growth platform, according to the IMF. Structural reforms can 150 help rebalance demand and supply while reducing vulnerabilities and 100 increasing economic efficiency. 50 In India, Urjit Patel’s selection as the new Reserve Bank of India (RBI) 0 governor sent a signal of commitment to inflation-targeting and strict -50 adherence to monetary policy. In China, economic and financial market -100 stability was markedly improved, thanks to the advent of further stimulus -150 policies. Chinese infrastructure investment has increased 18% year over -200 year (to end of November 2016), which is evidence of the country’s -250 dedication to expansion. -300 Latin America -350 India Malaysia Russia Turkey Indonesia This year, Latin America should begin a path toward resumed economic Market Implied Move (bps) AAM 1yr estimated move (bps) growth. Although the ride hasn’t exactly been smooth for the region over the Source: Aberdeen Asset Management, Bloomberg, November 2016. Forecasts are past few years, the IMF estimates a return to 1.5% growth within the year. offered as opinion and are not reflective of potential performance, are not guaranteed and actual events or results may differ materially. For illustrative purposes only.

04 of 12 Emerging-markets debt: Here and beyond Mired in political turmoil, export declines and volatile financial conditions, The governments of Latin America could be a major influential factor. many Latin American countries faced setbacks in trying to reach their About 64% of its young population still lives in poor households, leaving economic goals. Some Latin American countries continued to face many with access to poor quality public services, savings and social large exchange rate depreciations because of sluggish trade prospects. mobility, the OECD recently reported. Youth entrepreneurship and the Although the region could be returning to a growth cycle, it will be at improvement of skills could help this demographic get off the ground. modest annual rates in the range of 2-3%, according to the Organization Eastern Europe, Middle East and Africa (EEMEA) for Economic Cooperation and Development (OECD). Like Latin America, the EEMEA region (notably Russia) has had a challenging ride. Key oil-exporting countries, which include Russia, have endured fiscal The solution may already be within the region. It and financial stress amid uncertainty across the energy sector and falling is in its young population. oil prices. Again similar to Latin America, Russia could begin to rebound this year. The IMF projects the country will return to growth in the year, unless But there could be another way to transport Latin America to where oil prices plummet. Turkey is likely to encounter sluggish growth amid the it needs to be in terms of economic health. The solution may already ongoing political noise and rising local rates, while growth is set to pick up be within the region. It is in its young population. Latin America has in Sub-Saharan Africa, which is the high-yield area of the region. abundant untapped potential, with a quarter of its population aged between 15 to 29 years old. That’s 163 million people. This could present Overall, it’s been a bumpy road for countries across the developed and a unique demographic opportunity to build out the region’s skills in an era emerging markets. Still, there are many reasons to be optimistic about where skills are prized in the job search process. the future. Many emerging-markets countries have maintained their fundamental attractiveness despite recent events and may be poised for a return to economic growth as policymakers steer their countries towards the future.

Ukraine: Ukraine is the second largest country in Eastern Europe, and about 70% of the Turkey: In Turkey, 100% of China: Private sector wages population lives in urban the population has access across China were up 15% a areas, according to Britannica. to electricity, as of 2016, year, according to the IMF. : The U.S. is the according to the U.S. Central Dominican Republic’s (DR) largest trading Intelligence Agency. partner. About 49% of the DR’s exports go to the U.S., and 44% of imports are of U.S. origin, according to the International Trade Administration. Indonesia: Indonesia is the world’s 4th most populous nation and has a 89% literacy rate, according Brazil: Brazil’s Bolsa Familia Program to National Geographic. reaches more than 46 million people and is a social policy that provides Ghana: Ghana’s top export India: India’s GDP was support to the country’s low-income destinations are Switzerland, $37.7 billion in 1960, the families, according to the . China, France, India and the World Bank reported. In Netherlands, according to the 2015, it was $2.07 trillion. Observatory of Economic Complexity. : Argentina’s youth cohort (ages 15-24) is the largest in the country’s history, according to the U.S. Central Intelligence Agency.

For illustrative purposes only.

05 of 12 Chapter 4: Planning your trip

Are you ready to set forth into the world of emerging-markets debt? Then again, Mr. Trump has talked about appointing a more hawkish Fed Before you leave, it helps to have a plan in place. Let’s take a look at some chair and nominating Fed governors with similar philosophies to fill the of the major macroeconomic themes impacting emerging-markets debt, two existing vacancies. This may mean that U.S. interest rates will rise as well as the potential risks with respect to the asset class. quicker than originally anticipated. That would be a concern if growth in Mapping the lay of the land the U.S. doesn’t accelerate. Although there has been a recent global sell-off in government bonds, Investors are gravitating towards emerging-markets debt because of the yields in developed markets remain relatively low. Europe and Japan are ability to pick up additional yield relative to developed-markets debt. And still facing a number of hurdles to mounting a strong economic recovery. interest rates are high enough in emerging markets that many central And many central banks in the developed world are committed to banks can be flexible in implementing policy changes, such as cutting keeping loose monetary policy in place to support economic growth. interest rates if necessary. Outlooks are less clear at this point. Although the global economy has been mired in a pattern of sluggish growth, economic data has shown that emerging markets are embarking In general, outlooks are less clear at this point, given the unexpected on a gradual recovery. 1) The IMF currently predicts that economic Trump victory in the U.S. presidential election. The Fed may keep rate growth will accelerate this year for these markets. The recent rebound in hikes to a minimum to support the fragile recovery and guard against commodities is helping to sustain this trend. global market uncertainty and volatility.

06 of 12 Emerging-markets debt: Here and beyond Emerging markets’ growth should recover while developed markets’ growth remains subdued Percentage GDP growth, constant prices

8

7

6

5

4

3

2

1

0 Forecast

-1 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Euro area Major advanced economies (G7) and developing economies Source: IMF, World Economic Outlook, Oct 2016. Forecasts are offered as opinion and are not reflective of potential performance, are not guaranteed and actual events or results may differ materially. For illustrative purposes only. G7= The world’s seven most powerful industrialized countries - the US, Japan, Germany, the UK, France, Italy and Canada.

Planning for the worst • The Fed: Recently, the Fed decided to raise interest rates by 25 basis It’s important to consider the potential risks when investing in the rapidly points, marking the second interest-rate hike in the last decade. Going changing world of emerging-markets debt. Here are some of the main forward, the Fed will be forced to consider the state of international risks investors should be aware of: markets before deciding its next move. And raising rates too fast would risk stalling a gradual and shallow recovery. • China: The Chinese economy has experienced slower growth in recent years, but it is still a pretty fast pace of growth considering the rest of Investment risks will continue to evolve as changes occur in the global the global economy. In addition, a slowdown in growth is often a financial markets. There are plenty of investment opportunities in necessary consequence of restructuring an investment-led economy emerging-markets debt given existing macroeconomic trends, but towards a more sustainable model based on personal consumption and knowing the risks that accompany these opportunities can help keep a services. In fact, the services sector now accounts for a larger strategy grounded in reality. percentage of China’s GDP than manufacturing. Our base case is that China is currently at a happy medium in terms of economic growth, but a sharp potential downturn in the Chinese economy would likely have larger ramifications on the broader emerging markets. • U.S. President Trump: Mr. Trump has continued to reiterate the pledges he made on the campaign trail, vowing he will fight to bring manufacturing back to the U.S., while also proposing to place tariffs on products made outside of the U.S. This has already sparked some concerns in emerging markets as to the effects the Trump administration’s policies will have on emerging economies.

07 of 12 Chapter 5: What to pack

Emerging-markets debt is far from homogenous. Emerging-markets hard with the yield on the core indices converging with the yield on emerging- currency debt and local currency debt are two distinct asset classes with markets corporate debt. This happened despite a higher average credit different credit quality and regional compositions. They each respond to rating at BBB on the JP Morgan emerging-markets corporate debt index. varying return drivers. The same applies for emerging-markets corporate Relative value can also be found by comparing the spread differential bonds and frontier bonds, which have their own characteristics. Investors against U.S. corporate debt with the same credit rating. Emerging- looking to journey into emerging-markets debt may want to consider markets corporate debt has traded at wider spreads, despite having a which of these to bring or add into their portfolios. lower overall leverage in the same rating buckets as its U.S. counterparts. a. Emerging-markets hard currency debt In short, emerging-markets corporate bonds can be advantageous assets, Emerging-markets hard currency debt is the asset that started it all but because of lower liquidity, it’s often better to hold them rather than in emerging-markets debt. It is ultimately a spread asset. In other frequently trading in and out of the asset class. words, it is compared to the yields of developed-markets sovereign d. Frontier market bonds debt instruments and can offer attractive investments in a low-return Leaving emerging-market countries to travel to an even less developed environment. The emerging market spread (which measures the region may be too much of a risk for some investors. But for those with difference in yields between emerging-markets debt and U.S. Treasuries) a long-term mindset who are able to take on additional risk within their is currently around 330 basis points (bps), as measured by the JP Morgan portfolios, there are the frontier markets. EMBI Global Diversified Index. Current valuations within this asset class have fared positively. Frontier markets have become an important part of the emerging markets story. They were once viewed by investors as one-dimensional, Emerging-markets hard currency bonds offer low correlation to in that they were mostly driven by commodities. But that has evolved. developed markets and emerging-markets equities, which can be a Improving country fundamentals provided market access to many valuable diversification tool in today’s uncertain global climate. frontier countries, including the ones that are scarce in natural resources. b. Emerging-markets local currency debt Today, much of the growth in frontier markets is influenced by what is Emerging-markets hard currency debt may have started it all, but known as the demographic dividend. The demographic dividend is a term emerging-markets local currency debt is now the leader in terms of for economic growth that results from declining mortality and fertility, market capitalization. This means investments in local currency debt tend and the resultant change in the age structure of a country’s population. to have a profound influence on the economy of its respective country. The labor force in frontier markets has grown faster than the population How can it accomplish this? dependent on it, and infrastructure investment has expanded. As these A domestic bond that is rising in value can support local economic factors strengthened business activity, the market for bonds has gradually growth. In turn, the country’s debt profile improves, making it easier expanded. for the government to borrow at lower costs. This eventually creates a healthy cycle of development for emerging-markets countries, and for Those willing to buckle up for a long ride could be investors in these markets. the first to broaden their horizons and take Although increased volatility has made it a more difficult path for advantage of future opportunities. emerging-markets local currency debt over the past few years, emerging- markets local currency bonds have become an appropriate asset class Frontier-markets bonds represent only a fraction of the emerging-markets for a wider range of investors because of their size, growing liquidity and debt universe. As frontier markets continue to grow, opportunities continue dedicated research platforms. to open up. Until then, those willing to buckle up for a long ride could be the first to broaden their horizons and take advantage of future opportunities. c. Emerging markets corporate bonds Corporate bonds in emerging markets have also been attracting investor interest. Both U.S. high yield and European high yield had strongly rallied

08 of 12 Emerging-markets debt: Here and beyond Chapter 6: How it all fits together: a blended approach to emerging-markets debt

You have figured out what you’re packing for your trip. Now for the real Another advantage of using a blended approach applies to generating challenge: making sure it fits in your bag. Having a sense of how it all alpha, or excess return over a certain benchmark. Each type of emerging- works together can help you through this process. markets debt has different characteristics, which leads to differentiated sources of alpha. For example, risk assets such as emerging-markets The same can be said for constructing a blended portfolio consisting currency can provide investors with attractive return prospects when risk of different segments of the emerging-markets debt universe. Not all appetite increases, while high-grade hard currency corporate bonds can emerging-markets debt is the same, and it is essential to know how each offer downside protection during more difficult periods in the market segment will react to various market conditions. cycle. All of these types of emerging-markets debt have advantages The primary drivers of returns for emerging-markets hard-currency during various points in the market cycle. sovereign debt are a country’s default rate and the levels of U.S. Treasury When constructing a blended portfolio, it is important to understand the yields. A country’s probability of default is determined by a variety various components and how they complement one another. Emerging- of factors, including economic growth, level of public debt and fiscal markets hard currency debt, emerging-markets local currency debt, conditions. Emerging-markets corporate debt is subject to these drivers emerging-markets corporate bonds and frontier-markets bonds are as well, and also considers the credit quality of the corporate issuer. And distinct asset classes that exhibit different credit quality and regional emerging-markets local currency debt is driven by currency valuations in compositions while responding to different drivers of return. Each asset addition to interest rates. So each segment’s performance is dependent class has its own unique characteristics and advantages. upon different circumstances. It is possible for some investors to make their own asset allocation Each segment has strong merits as a standalone asset class. But a decisions to achieve a blended portfolio. Another option is to hire a blended approach results in a portfolio that is diversified across a range specialist fund manager to help find attractive return prospects within of different countries, instruments and currencies. This can help the the asset class. Either way, making sure it all fits together when you first portfolio perform well in a variety of market environments, as each begin your journey will make for much smoother sailing as you continue component will react differently as conditions change. on your adventure. Each type of emerging-markets debt has different characteristics, which leads to differentiated sources of alpha.

09 of 12 Chapter 7: A change of plans

To paraphrase Robert Burns, “the best laid plans of mice and men often And then there’s the U.S. presidential election. While few predicted go awry.” This observation may come to mind for the world traveler that Donald Trump would emerge victorious against his rival Hillary dealing with delayed flights, lost baggage and road closures. It also Clinton, this is exactly what happened. Similar to Brexit, the polls and describes the often unexpected political events we experienced around commentators got it wrong, and many predicted that this outcome the globe in 2016. would immediately lead to Armageddon in the financial markets. And again, many of these initial predictions have been mistaken thus far, as In June, we had the UK’s referendum on whether or not to remain part equity markets have continued to rise on the hope that Trump’s policies of the European Union (EU). While consensus expectations and pundits will indeed spur growth in the U.S. economy. predicted that the UK would vote to remain in the EU, it turned out that UK voters had other ideas. While the referendum was anything but But unlike Brexit, which is mainly centered on the relationship between a landslide for one side over the other, a majority of voters indicated the UK and the EU, U.S. policies under the Trump administration could they wanted to leave the EU (also known as “Brexit”), resulting in the have a direct impact on emerging markets, if Mr. Trump’s campaign resignation of former Prime Minister David Cameron and the election of rhetoric is to be taken seriously. Throughout the campaign, Mr. Trump Theresa May as his successor. called for bringing production back to the U.S. and renegotiating trade deals that he believes are hurting American workers. If tariffs are imposed, There are many uncertainties that still need to be it would hurt profitability for companies in emerging markets such as worked through. China and Mexico. The Brexit vote sent markets reeling at first, as many believed that leaving If Trump follows through with some of the trade policies he has proposed, the EU would cause an immediate recession in the UK. So far, though, this this is likely to be a negative for global trade, particularly for Asia and threat hasn’t materialized, although there are many uncertainties that some of the countries in the broader emerging markets. However, there is still need to be worked through. Markets have stabilized, and bond yields also a greater probability of expansionary fiscal policy, which would allow have stayed near record lows as central banks in developed markets held for the possibility of a slightly higher path for global inflation. But for rates steady to guard against the risk of a global economic downturn. now, a greater degree of uncertainty exists, as the actual policies that will be delivered by a Trump presidency are difficult to predict. While the developed world continues to process what Brexit will mean from a trade and immigration standpoint, emerging markets don’t seem It is important to prepare for the unexpected as to be as concerned about the situation. As time has passed, investors have begun to view Brexit as a local problem rather than a global one. much as you possibly can. For this reason, many of them are looking at investments that stay as far There will always be uncertainties surrounding a new journey – whether away from any potential Brexit trouble as possible, and the developing related to travel or investments. In both cases, it is important to prepare world fits the bill. for the unexpected as much as you possibly can. When traveling, it Although governments and consumers in some emerging markets may can mean keeping copies of your passport handy in case the original be as strapped for cash as their developed market counterparts, many document is lost, or having a carry-on bag packed with essentials in case are not. And many of these countries still have leeway for some policy your checked bag doesn’t arrive at your destination. When investing, response from their respective central banks if the situation takes a a diversified portfolio of global investments can help you prepare for turn for the worse. Considering the proliferation of zero and negative the many changes that the financial markets often endure. A blended interest rates, this isn’t an option available to many central bankers in the portfolio of emerging-market debt can help you with this effort. developed world.

10 of 12 Emerging-markets debt: Here and beyond Chapter 8: Going beyond

Our travels through the world of emerging-markets debt have taken us Emerging markets are already major players in the global economy, and through various regions of the globe and allowed us to explore the many emerging-markets debt will continue to gain prominence as a global opportunities that the asset class has to offer. But the journey doesn’t investment opportunity. Not only does this asset class offer relatively end there: higher yields than comparable bonds in developed markets, but it also can provide a way to gain further diversification, which can help manage • Over the past two years, over 100 million households have moved into risk within a portfolio. For those who are traveling the world far and wide the middle income range within emerging markets.3 in the search for income, emerging-markets debt should prove to be a • The share of global retail sales attributed to emerging markets grew popular destination – one that offers a world of opportunity. from 32% in 2000 to 51% in 2015.4 • By 2020, a further one billion unique mobile subscribers will be added globally, with the vast majority of this growth coming from emerging economies.5 These trends are expected to continue as emerging markets expand and develop. With their favorable demographics and continued economic expansion, emerging markets are forecasted to become even larger contributors to the global economy in the years to come. According to PricewaterhouseCoopers, expectations are that China, India, Indonesia and Brazil will be four of the five largest economies in the world.6

Image/Video creditszdifeng / ShutterstockdieKleinert / Alamy Stock PhotoMattia Dantonio / Alamy Stock PhotoZoonar GmbH / Alamy Stock Photo.

3 Credit Suisse. “Mega-Trend of Growing Emerging Middle Class Remains on Track.” January 4, 2016. 4 A.T. Kearney. “Emerging Market Retailing in 2030: Future Scenarios and the $5.5 Trillion Swing.” 2016. 5 Source: GSMA, February 2016. 6 PricewaterhouseCoopers, “The World in 2050,” February 2015.

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IMPORTANT INFORMATION PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RESULTS International investing entails special risk considerations, including currency fluctuations, lower liquidity, economic and political risks, and differences in accounting methods; these risks are generally heightened for emerging market investments. Concentrating investments in a particular region subjects an investment to more volatility and greater risk of loss than geographically diverse investments. 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12 of 12 Emerging-markets debt: Here and beyond