NN Investment Partners - Emerging and Frontier Market Debt
Marco Ruijer Portfolio Manager | Marzo 2018 1. EMD Outlook 2018: Driven by Solid Fundamentals
2 EM Fundamentals Growth is expected to pick up further GDP growth rates 10 Emerging Markets Major advanced economies (G7) 8 Growth differential
6
4
2
0
-2
-4 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 2020
Source: IMF World Economic Outlook 2017 (October 2017)
Growth differential between Emerging and Developed countries will likely pick up again
3 EM Fundamentals Current Account Balances of Emerging Countries largely have healed
GBI-weighted EM current account to GDP ratio
EM Current Account Balance (index weighted) 0.50%
0.00%
-0.50%
-1.00%
-1.50%
‘Fragile five’ current accounts looking less fragile -2.00%
Source: JP Morgan, Bloomberg, NN IP
Imbalances of EM countries have corrected since 2013 reducing the need for higher risk premia
4 EMD & FMD – Yield Advantage EMD HC Euro HY EM Corporate
9.0 UST 10Y Germany 10Y Frontier Debt EMD Local Bonds 8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
-1.0 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18
Source: JP Morgan indices yields; TR Eikon, NN IP; Date: Jan-2018Yield pick-up of EM Bonds continues to provide a strong push factor for the asset class
5 Higher Economic Growth in EM & FM
6.0 Average growth over 2018 & 2019 - projections by IMF
5.0 4.90
4.0 3.41 3.41 3.18 3.0
2.12 2.0 1.65
1.0 0.74
0.0
USA
Japan
MENA
Europe
Overall
EM & FM & EM FM & EM FM & EM Germany
Source: IMF; Date: Oct-2017; (the EM countries include frontier SSA FM & EM market countries) Emerging & Frontier Markets continue to have meaningfully higher growth than DM
6 2. A Strong Investment Case for Frontier Markets
7 A Strong Investment Case for Frontier Markets
Frontier Markets offer exposure to Investors benefit from
• Higher potential economic growth • Yield advantage over comparable asset classes • Demographic dividends and dynamic economies • Relatively shorter duration, lower sensitivity to • Return opportunities offered by less efficient US rates capital markets • Return potential through long run credit • Broadened investment universe improvement • Increased portfolio diversification, strong support from multilateral
Catch up & Convergence
8 Risk-Return of EMD Sub-asset Classes Risk and returns between Jan-2003 and Dec-2017 12.0% Frontier Debt
10.0% US HY EUR HY MSCI Emerging EMD HC Markets 8.0%
EM Corp MSCI World EM Local 6.0% Bonds US IG
MSCI EAFE 4.0%
EMD LC Annualized return Annualized US Treasury 2.0%
0.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% Volatility Sources: JP Morgan, Bloomberg, TR Eikon. Benchmarks used are Barclays US Treasury, JPM US IG Corporates, JPM US HY, JPM ELMI+, JPM EMBI Global Diversified, JPM CEMBI Diversified, JPM GBI-EM Global Diversified, JPM NEXGEM, MSCI World , MSCI EAFE and MSCI Emerging Markets.
In the long run, EMD shows favourable risk/return characteristics – compared to other asset classes
9 Frontier Market – Performance Comparison Rebased, cumulative index returns for... 160 Nexgem Cembi LatAm Cembi HY Return/ risk
2018 150 - 1.449
140 Return/ risk 130 1.091
120 Return/ risk 0.775 110
100
90 Source: JP Morgan, NN IP (weekly data), as of Jan of as (weekly IP data), NN Morgan, JP Source:
80 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Over the past five years, the Frontier Market Debt index has outperformed EM Corporate LatAm sub-index as well as EM Corporate HY sub-index, with a superior return/ risk ratio.
10 EM Countries with IMF Assistance
Country IMF program Program Focus/Comments
Latin America Colombia Yes FCL Honduras Yes Program expires in Dec 2017, but maybe rolled Jamaica No They just finished IMF program in March 2017, now they have an SBA Mexico Yes FCL Paraguay Yes Technical assistance in regards to designing fiscal rules Eastern Europe Bosnia and Herzegovina Yes Extended Fund Facility-3 yrs program starting 2016 to improve business climate, fiscal policy, and financial sector stability Georgia Yes Extended Fund Facility-3 yrs program starting 2016 to reduce economic vulnerabilities, pursue well-coordinated policies, and promote economic growth Serbia, Republic of Yes Standby Agreement to be concluded in Oct 2017 to restore public finances’ health; increase the stability of the financial sector; and structural reforms Ukraine Yes 4 yrs extended Agreement to restore stability and lay the basis for robust growth over the medium term Sub-Saharan Africa Cameroon Yes ECF program to restore external balances in Cameroon and in the CEMAC region Ghana Yes ECF program focus is on fiscal report , debt sustainability Gabon Yes EFF program to restore external balances in Cameroon and in the CEMAC region ECF & EFF program focuses on maintaining fiscal discipline and strengthening buffers for future shocks, while creating fiscal space for infrastructure and social Cote D'Ivoire Yes spending Kenya Yes SCB/SBA program, stand-by arrangements Nigeria Yes only PSI program Rwanda Yes PSI & SCF programs Senegal Yes only PSI program Tanzania Yes only PSI program Middle East Egypt Yes Structural reforms, balance of payments Iraq Yes Fiscal budget independent of oil prices Jordan Yes Fiscal reform, debt sustainability Morocco Yes Precautionary and liquidity line only, decreasing amount (more confidence) Tunisia Yes Fiscal consolidation (wage bill cut), exchange rate flexibility Asia Mongolia Yes Fiscal consolidation (expenditure cut), external resilience Sri Lanka Yes Fiscal consolidation (tax income generation)
As of Sep-2017; Source IMF, NN IP EMD Team 11 Correlations of EMD Sub-asset Classes
HC Frontier HC Sovereign HC Corporate LC Money Market LC Bonds Markets Benchmark Performance Annualized Return (%) 8.8 11.2 7.4 4.8 7.5 Annualized Volatility (%) 8.1 12.5 8.8 7.5 11.8 Return/ risk 1.09 0.90 0.83 0.63 0.64 Correlation: U.S. Treasury 0.32 -0.02 0.29 0.03 0.16 Correlation: MSCI World 0.61 0.62 0.61 0.75 0.70 Correlation: EM Equities 0.67 0.66 0.64 0.81 0.79
Data covers the period between Jan-2003 and Dec-2017;
Sources: JP Morgan, Bloomberg, TR Eikon. Benchmarks used are Barclays US Treasury, JPM ELMI+, JPM EMBI Global Diversified, JPM CEMBI Diversified, JPM GBI-EM Global Diversified, JPM NEXGEM, MSCI World and MSCI EM.
12 Spread Evolution for FMD & EMD HC
Spread Frontier Debt index Spread EMD HC index
800
700
600
500
400
300
200
100 May-13 Sep-13 Feb-14 Jun-14 Nov-14 Apr-15 Aug-15 Jan-16 Jun-16 Oct-16 Mar-17 Aug-17 Dec-17 Source: JP Morgan, Bloomberg (weekly data), as of Dec-2017
Given relatively stable commodity prices, Frontier Market Debt offers relatively attractive valuation.
13 3. Team and Investment Philosophy
14 Emerging Market Debt Team 19 Investment Professionals with 13 yrs. average experience GILT Oversight Han Rijken Marcelo Assalin, CFA Head EMD experience Experience since 1996 since 1992 Multi-Asset EM Local Currency EM Hard Currency EM Corp. + Asian HC EMD Blended 21 professionals
Global Credit
40 professionals Marcelo Assalin, CFA Marco Ruijer, CFA Joep Huntjens Marcelo Assalin, CFA Lead PM Lead PM Lead PM Lead PM Global Fixed Income Exp. since 1996 (NL) Exp. since 1998 (USA) Exp. since 1996 (SG) Exp. since 1996 (NL)
Lewis Jones, CFA Jared Lou, CFA Luis Olguin, CFA 9 professionals PM (USA) PM (USA) PM (USA) Global Trading Daniel Wood Leo Hu, CFA Annemieke Coldeweijer PM (NL) PM (SG) PM (NL) 18 professionals Johnny Chen, CFA Thai Le EMD Corporate Analysts PM (SG) PM (NL) Investment Services Mariana Villalba, CFA Zoia Korepanova Wee Lee Cheng Nora Szokol, CFA Roy Scheepe Annika Wong Sr. Client Portfolio Manager Implementation (NL) PM (NL) (NL) (NL) (SG) Girish Patil Shilpa Singhal, CFA Desmond Lim, CFA Clement Chong Sr. Portfolio Specialist EMD (SG) (SG) (SG) Joyce Tan Portfolio Specialist Asian Debt
15 NN IP EMD – Investment Philosophy & Approach We believe:
EMD is an Evolving Asset class • Long term improving fundamentals of many Emerging Markets. • We have a medium-term focus to identify these improving trends.
• Rigorous disciplined research can uncover mispricing as Emerging Markets are less efficient than Developed Markets • Use primary research and get closer to issuers to get to know them better. Research is Critical • EMD bottom-up and top-down expertise deepens understanding of performance drivers and improves decision-making quality. • A fundamental process (rather than pure quant-based) is best suited to uncover the potential of Emerging Markets.
• We believe in diversification discipline as this will offer the best risk / Diversification Augments Success reward trade-off. • Risk Management is an integral part of decision making. • We look at risk from different perspectives.
16 EMD Hard Currency Investment Process Summary A visual summary of various steps
Step 1: Step 2: Step 3: Step 4: Global Macro Assessment Country Analysis Instrument Selection Portfolio Construction
Global EMD top-down Detailed scorecards for over 70 • Yield curve analysis Adherence to portfolio-specific • Economic outlook countries, across 3 beta buckets, • Liquidity analysis guidelines • Monetary policy & rates assessing • Various issuer types: sovereign, environment quasi-sovereign, sub-sovereign, Multiple risk perspectives • Tail risks • Growth stability and supra-national and corporates • Allocations to beta buckets EMD HC top-down development • Various instrument types: • Ex-ante tracking error • Fundamentals • Fiscal firmness eurobonds, sukuk, LPN, GDP • Active spread duration • Market Technicals • External endurance warrants, CDS, TRS etc. • Active interest duration • Valuations • Governance • Duration-times-spread
Quantum of risk score Proprietary country scores Instruments with attractive Well diversified portfolio risk/return profile Our active management is based on fundamental research and diversification discipline.
17 4. Asset Class Performance
18 EMD Historical Market Performance
Source: JP Morgan, Barclays, NN IP; Date: Jan -2018 Attractive carry in EMD is an important driver of long term returns
19 Key Takeaways – Our Conviction
• Within Fixed Income , EMD HC has shown attractive risk/return profile over the past 15 years
• Within EMD, we expect Frontier Markets Debt (NEXGEM) to continue its historical outperformance
• NNIP offers a full range of EMD strategies, including: • Dedicated EMD Hard Currency strategy • Dedicated Frontier Markets Hard Currency strategy
• NNIP is a pioneer in the EMD asset class with a 25 year track record (since February 1993)
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21 22 NN Investment Partners - Emerging and Frontier Market Debt
Marco Ruijer Portfolio Manager | Marzo 2018