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Emerging Market Corporate Bonds Accessing Some of the World’S Potential Growth Opportunities Fall 2013

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Emerging Market Corporate Bonds Accessing Some of the World’S Potential Growth Opportunities Fall 2013 Emerging Market Corporate Bonds Accessing some of the world’s potential growth opportunities Fall 2013 Contents Executive summary 03 Introduction 04 Emerging Market corporate bonds 06 - 10 key characteristics 06 Conclusion 12 - A compelling asset class 12 Risks 13 Aberdeen’s investment process for Emerging Market corporates 14 Appendix 1 15 - FAQs 15 Appendix 2 16 - Indices 16 Appendix 3 17 - Regional characteristics 17 01 of 20 City people - a street scene. 44 million people join urban populations in developing Asian countries each year. 20,000 new dwellings and 250km of new roads are constructed every day. Source: Asian Development Bank, The Economist, 2013 02 of 20 Executive summary Emerging Markets Emerging Market corporate debt – why are they attractive? – understanding the risks • We believe Emerging Markets (EM) present some of the world’s most • EM corporate bondholders face the same issues of transparency and dynamic growth opportunities. Abundant natural resources, favourable corporate governance as EM equity investors, albeit that market demographics and structural credit improvement combined with fiscal liquidity and bond structure are areas of greater consideration. and corporate reforms have led to improving economic fundamentals • In terms of capital structure, priority access to cash flow is crucial in (i.e. good corporate balance sheets, strong fiscal discipline and solid determining default and recovery scenarios, which in turn drives the growth dynamics). relative valuation of a bond. It comes down to the exact position of the • We believe investing in EM corporate bonds is attractive because we debt within the company structure, which can often be more consider these companies fundamentally sound and they operate in complicated to discern in EM companies. stable macroeconomic environments. Banking systems are relatively • Accounting standards and corporate governance in EM still somewhat stronger and, unlike the fragile banking systems in developed lag those of developed economies. Comprehensive research into each economies, are robust and have the ability to provide liquidity and corporate bond and the market in which it operates is therefore required. credit for these companies to grow. • Foreign securities are more volatile, harder to price and less liquid Emerging Market corporate debt than U.S. securities. As mentioned above, they are subject to different – why now? accounting and regulatory standards. These risks are enhanced in EM countries. • The size of the EM corporate bond market is currently estimated at over US$1 trillion.A Emerging Market corporate debt • Over the past six years, corporate and quasi sovereign bond issuance – Aberdeen Asset Management’s strengths A has been over US$1.2 trillion , nearly three times the level of sovereign • Aberdeen has a strong local presence, with over 70 EM investment bond issuance. We expect this trend to continue, providing a wide set professionals worldwide located in Asia, London and Sao Paulo. of opportunities to enter the asset class. • Long history of investing in both the EM debt and equity markets – up to • The majority of EM corporate debt stock is investment grade. a third of Aberdeen’s total Assets under Management are invested in EMs. Furthermore, bigger issuance sizes and a more dedicated investor base • Well resourced, stable and experienced team with a robust track record have improved market liquidity. of investing in EM debt across a number of market cycles. • Inflows into the entire ‘EM debt’ universe reached a new record of • We have been investing in the EM corporate markets for over 10 years. US$94 billion in 2012B, exceeding the US$80 billion reached in 2010. We expect healthy inflows to continue in 2013. • We work closely with our global EM equity team and have a history of managing combined debt and equity mandates. Together with our • Many EM countries are likely to see continued corporate bond issuance equity colleagues, we research approximately 1,000 EM companies a in the foreseeable future as domestic and international investment year - we believe this is one of our strongest competitive advantages. interest increases. • We conduct fundamental top-down and bottom-up credit analysis, providing comprehensive coverage of all factors relevant to the asset class. • We rely on proprietary research to provide a deeper insight into the companies in which we invest. • The depth of our experience enhances our ability to interpret macro and industry news allowing us to make rapid decisions and implement trades quickly. A Source: JP Morgan, January 2013 B JP Morgan, January 2013 03 of 20 Introduction Over the past 20 years, economic, political and technological events have led to a dramatic growth in Emerging Market economies. Increased globalization, the dissolution of the communist bloc and the opening up of previously inaccessible markets such as China have all played a part in the expansion of investment opportunities in these countries, which has in turn helped to reshape the investment universe in Emerging Markets. 04 of 20 Emerging countries have seen their economic positions improve through The market turmoil of 2011, caused by the uncertainty surrounding the a number of hard learnt lessons. The crises experienced by various regions fate of the EurozoneC, saw EM corporate bonds suffer along with other (the Tequila crisis in 1994, the Asian and Russian crises in 1997/98 and asset classes regarded as ‘risky’. The price of bonds of fundamentally the credit crisis of 2008/09) have been key tests for EM economies. In strong EM companies fell to attractive levels which proved to be a good particular, the Asian currency crisis led EM authorities to make greater time for investors to enter the asset class. efforts to protect their economies from ‘hot’ money – foreign inflows of capital that, while helpful for inward investment, left the countries vulnerable to any rapid withdrawals of this capital. Asia and other countries built up large foreign reserves, while many of the companies worst affected by the currency crisis adopted more conservative policies. As a result, emerging economies were generally less affected by the 2008/09 credit crisis than their developed market counterparts. EMERGING MARKETS EM economies are defined by the International Finance Corporation (IFC) as economies with a low to middle per capita income. These economies largely span developing countries in three regions: Asia, Latin America, and CEEMEA (Central Eastern Europe, Middle East and Africa). Emerging economies today are generally characterised by favourable demographics and strong financial footing and lower levels of debt than their Western counterparts. EM corporate bonds are bonds issued from countries in Emerging Market regions. In this paper, we look at the growth in the EM corporate bond market, why we believe this market is increasingly attractive as a standalone asset class and the risks that might be associated with investment. Aberdeen’s expertise in EM companies Central and Eastern Europe London Budapest Middle East Emerging Asia Africa Hong Kong Bangkok Kuala Lumpur Singapore Latin America Sao Paulo Emerging Market offices Source: Aberdeen Asset Management For illustrative purposes only. C Eurozone refers to the bloc of nations that have adopted the euro as common currency and legal tender. 05 of 20 Emerging Market corporate bondsD - 10 key characteristics As with developed market corporate bonds, EM corporate bonds are 1. Size of the market publicly traded debt instruments issued by companies that wish to raise The EM corporate bond market is an extremely large and fast growing capital through both public and private markets. Corporate bonds may be asset class. more attractive to investors than sovereign bonds because of the higher yield available in compensation for the fact that corporations are, in Chart 1: EM corporate bond market – growing into a mainstream aggregate, more likely to default on their debt than governments. asset class There has always been a compelling story for EM corporates due to a Relative size of markets much greater capacity for growth of their relevant markets and improving (USD millions) demographics. Over the past ten years, growth in EM has accelerated 5,000 against a backdrop of recovering financial systems and strong regulation 4,500 – the result of various crises experienced in these regions – and easing 4,000 credit conditions, which has in turn been beneficial for EM companies. 3,500 3,000 We highlight 10 key characteristics of the Emerging Market corporate 2,500 bond market that make it an increasingly viable alternative for fixed 2,000 income investors: 1,500 1. Size of the market has increased significantly 1,000 500 2. Liquidity has been supported by greater issuance 0 3. More than two-thirds of the bonds are investment grade US High US Euro High Euro EM EM Sovs EM Sovs Yield Investment- Yield Investment- Corps (HC) (LC) 4. Diverse by region, quality and sector grade grade 5. The investor base has broadened US HY: ML US High Yield Master II Index, US IG: ML US Corporate Master Index, Euro HY: ML Euro High Yield Index, Euro IG: ML EMU Financial Corporate Pfandbrief Index, 6. Default rates have been low EM Corps: ML Emerging Market Corporate Plus Index, EM Sovs (HC): Emerging Market 7. Valuations are attractive External Debt Index, EM Sovs (LC): ML Local Debt Markets Plus.Source: Merrill Lynch, as at 31 Dec 2012. For illustrative purposes only. Indexes are unmanaged and are provided 8. Market fundamentals have been very positive for comparison purposes only. No fees or expenses are presented. You cannot invest 9. Coupons may provide a valuable source of return directly in an index. (HC) - Hard currency; (LC) - Local currency. 10. Emerging economies have strengthened their capital position 2. Liquidity has been supported by greater issuance Issuance picked up in 2009, with US$125 billion corporate bonds issued. Issuance in 2010 surpassed expectations by reaching a record US$204 billion. In 2011, corporate issuance remained strong and far outstripped that of sovereign bonds.
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