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For institutional investors only / not for public viewing or distribution
Asset Management
Fixed Income Boutique
Vontobel – Emerging Markets
Deep dive into Emerging Markets Corporate Debt
Approved for institutional investors in LU, AR, UY (Professional Investors only)
March 2020
Wouter van Overfelt
This document was produced for the
meetings taking place in Argentina and Uruguay
during 09th, 10th, 11th and 12th March
2020. It is not for onward distribution to
any third parties.
Overview
Why now? The 7 Goals
Market Outlook
Frequently Asked Questions
Conclusion
3
For institutional investors only / not for public viewing or distribution
Investors wish list? 7 goals
High
Yield
Low
Duration
Low
Default Risk
Well
diversified
Low
Volatility
Limited
Drawdowns and
Performance
Convexity
Decorrelated
01 03 05 07
02 04 06
4
For institutional investors only / not for public viewing or distribution
1 & 2. EM Corporates: high relative spread/low duration
Bubble size represents
market value in bn USD
Source: ICE BofA Merrill Lynch US Corporate Index, ICE BofA Merrill Lynch Euro Corporate Index, J.P. Morgan CEMBI Broad Diversified, J.P. Morgan EMBI Global Diversified,
ICE BofA Merrill Lynch US High Yield Index, ICE BofA Merrill Lynch Euro High Yield Index, as of 31.12.2019, Bloomberg. Average index ratings indicated within the brackets.
EM Corp HY (BB-, 424)
EUR Corp IG (A-, 2625)
EM Sov/Qsov (BB+, 1152)
US HY (B+, 1242)
EUR HY (BB-, 306)
US Corp IG (A-, 7307)
EM Corp (BBB-, 1079)
0
100
200
300
400
500
600
2 3 4 5 6 7 8 9
Sp
read
Duration
5
For institutional investors only / not for public viewing or distribution
1. The importance of high yield
We observe a link in spread markets between the starting yield and the performance which
is effectively achieved over a 5-year rolling holding period
Note: each dot represents an annual, rolling, 5-year annual return versus the original yield of the index.
Source: Vontobel Asset Management, Bloomberg, from 31.12.2001 to 31.12.2019.
31.12.2019
31.12.2019
31.12.2019
31.12.2019
31.12.2019
-5%
0%
5%
10%
15%
20%
25%
0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 22% 24% 26%
An
nu
alized
To
tal R
etu
rn (
over
5 Y
ear
Tim
e H
orizon)
Starting Yield to Maturity
EM Sov
EM Corp
EM Corp HY
US Corp IG
US HY
6
For institutional investors only / not for public viewing or distribution
Difference in consequences of defaults in DM versus EMEM HY default rate versus DM
39%
35%
25%
2%
55%
10%
23%
12%
0%
10%
20%
30%
40%
50%
60%
Missed payments(interest and/or principal)
Bankruptcy Distressed exchange Other*
DM EM
Much less outright bankruptcies meaning more
room to negotiate recovery levels
Source: J.P. Morgan “Emerging Markets Corporate 2019 Review – performance, defaults, and supply”, as of 07.01.2020 (l.h.s.). Moody’s Investor’s Service “Emerging and
Advanced economy default rates are similar, but with different catalysts”, as of March 2018 (r.h.s.).
3. Low default risk
Looking ahead to 2020, the lowest default rate is expected for European credit at 2.0%, followed by EM HY corporates at
2.4%, and US HY with 3.0%.
7
For institutional investors only / not for public viewing or distribution
3. Low default risk:Fundamentals in EM Corporate compare favorably to DM equivalents
Source: JP Morgan, as of 30.09.2019.
8
For institutional investors only / not for public viewing or distribution
4. Well diversified...at the issuer level
Source: J.P. Morgan “2020 Outlook: Sharpe and steady wins the race”, as of November 2019.
408
490
582 784 961
1.1
27
1.0
41
1.1
10
1.2
61
1.3
74
1.4
83
197 219 2
79
323
419
507
621 7
04
815 787
896
0
500
1.000
1.500
2.000
2.500
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Bo
nd
sto
ck
(in U
SD
bn)
Investment Grade High Yield & Non-rated
Total EM Corporate external bond stockNumber of countries & issuers in EMBI & CEMBI
9
For institutional investors only / not for public viewing or distribution
4. Well diversified
Source: Bloomberg, J.P. Morgan, as of 06.01.2020.
Sector breakdownGeographic breakdown
CEMBI BD has more Asia and Middle East, less Africa, CEE and Latam than
EMBI GD
With a broad sector diversification, less exposed to Financials than DM, and
not just an energy play
37%
28%
17%
11%
7%
0%
5%
10%
15%
20%
25%
30%
35%
40%
Asia Latin Middle East Europe Africa
30%
13%
6%
11%
9%
6%
25%
0%
5%
10%
15%
20%
25%
30%
35%
Financial Oil & Gas Metals &Mining
Utilities Consumer RealEstate
Others
USD REVENUES ALM MAINLY LC OTHERS
10
For institutional investors only / not for public viewing or distribution
5 & 6. Low volatility / Limited Drawdowns: Emerging corporates have strong metrics
Emerging Corporates specifically have not historically proved to be as volatile as investors expect
Past performance is not a reliable indicator of current or future performance.Source: Vontobel Asset Management, Bloomberg, 13.11.2015-31.01.2020.
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
JP
MC
EM
BI (C
orp
)
Barc
lays
Glo
bal A
gg
US
Corp
Euro
Gov
US
T In
dex
JP
ME
MB
I (S
ov)
US
HY
JP
MG
BI-
EM
(L
C)
MS
CI
Wo
rld
S&
P 5
00
MS
CI
EM
Annualized Volatility Max. Drawdown
11
For institutional investors only / not for public viewing or distribution
5. Low volatility: Elevated risk adjusted returns for EM Corporate as historically (low) risk has been well remunerated…
Source: Vontobel Asset Management, Bloomberg, as of 27.09.2019.
1,5
1,0
1,4
0,3
1,2
1,4 1,4
1,2
0,2
0,9
1,4
1,1
1,6
0,4
1,5
1,8
2,0
1,4
0,2
1,0
1,7
0,9
1,1
0,2
0,9
1,0
0,7
0,8
0,3
0,7
0,0
0,5
1,0
1,5
2,0
2,5
EMCorporates
EMSovereigns
NEXGEM EM LocalCurrency
US IG US HY Euro IG Euro HY MSCI EM S&P 500
Since 2010 2010 - 2014 2015 - current
….and even improved in the past few years
12
For institutional investors only / not for public viewing or distribution
How long does it take you to recover? Five worst losses since 2007
6. Cross asset focus on historical drawdowns
Source: Vontobel Asset Management, Bloomberg.
Barring 2008, losses have not exceeded >10% (index). Crucially, recoveries are quick, certainly compared to equity but
also compared to US Treasuries (see r.h.s.) .
Days
13
For institutional investors only / not for public viewing or distribution
7. Emerging Markets Corporate Debt: Cross asset correlations
Distribution of 6-month rolling correlation of the J.P. Morgan CEMBI Broad Diversified index with
major asset classes based on weekly data
Past performance is not a reliable indicator of current or future performance.Net performances indicated. Performance data does not take into account any commissions and costs charged when
shares of the fund are issued and redeemed, if applicable. *Bloomberg Commodity Index.
Source: Bloomberg, Vontobel Asset Management, correlation coefficients as of 31.01.2020.
-40%
-20%
0%
20%
40%
60%
80%
100%
Overview
Why now? The 7 Goals
Market Outlook
Frequently Asked Questions
Conclusion
15
But we are monitoring scenarios that could disrupt consensus…
Source: IMF.
Coronavirus
The Next Recession
No Deal Brexit
Falling Liquidity
US Dollar
Trade War
Current situation…
US Elections
Inflation
For Institutional Investors only / not for public viewing or distribution
Source: IMF.
16
For institutional investors only / not for public viewing or distribution
Post GFC Average: 5,57
0
2
4
6
8
10
12
14
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
201
1
201
2
201
3
201
4
201
5
201
6
201
7
201
8
201
9
Post GFC Average JPM CEMBI BD Yield
Valuations: Yield. Trading slightly tighter than historical averages
Past performance is not a reliable indicator of current or future performance.Source: JP Morgan, Vontobel Asset Management, as of 31.01.2020.
GFC: Global Financial Crisis.
Fed hiking cycleFed hiking cycle
Still attractive compared to other asset classes
17
For institutional investors only / not for public viewing or distribution
Post GFC Average; 345
0
200
400
600
800
1000
1200
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
201
1
201
2
201
3
201
4
201
5
201
6
201
7
201
8
201
9
Post GFC Average JPM CEMBI BD Spread
Valuations: Spread. Trading slightly tighter than historical averages
Lightly trimming risk after the recent leg down in global rates
Attractive EM Spreads from a historical perspective
Past performance is not a reliable indicator of current or future performance.Source: JP Morgan, Vontobel Asset Management, as of 31.01.2020.
GFC: Global Financial Crisis.
Fed hiking cycleFed hiking cycle
18
For institutional investors only / not for public viewing or distribution
Relative yields still attractive compared to DM
Past performance is no guide to current or future performance.Source: Vontobel Asset Management, JP Morgan, BofAML, 30.01.2020
0
50
100
150
200
250
300
350
400
450
500
550
600
650
700
750
800
850
900
31
/12
/201
2
31
/03
/201
3
30
/06
/201
3
30
/09
/201
3
31
/12
/201
3
31
/03
/201
4
30
/06
/201
4
30
/09
/201
4
31
/12
/201
4
31
/03
/201
5
30
/06
/201
5
30
/09
/201
5
31
/12
/201
5
31
/03
/201
6
30
/06
/201
6
30
/09
/201
6
31
/12
/201
6
31
/03
/201
7
30
/06
/201
7
30
/09
/201
7
31
/12
/201
7
31
/03
/201
8
30
/06
/201
8
30
/09
/201
8
31
/12
/201
8
31
/03
/201
9
30
/06
/201
9
30
/09
/201
9
31
/12
/201
9
Spread Evolution of various fixed income asset classes (to 31.01.2020)
EM Sov HY
EM Corps HY
US HY
EUR HY
EM Sov IG
EM Corp IG
US IG Corp
EUR IG Corp
Overview
Why now? The 7 Goals
Market Outlook
Frequently Asked Questions
Conclusion
20
For institutional investors only / not for public viewing or distribution
Isn’t EMC a “niche” asset class?
Few dedicated investors in the EM Corporates market -> amplified mispricings -> active managers’ paradise
Index vs. Market Size of EM HC Sovereign, EM HC Corporates and EM LC (in USD bn.)
1.137
1.072
1.269
16% 3% 7%0
200
400
600
800
1.000
1.200
1.400
EM HC Sovereign EM HC Corporate EM LC
Ma
rke
t S
ize
an
d A
uM
(in
bn
US
D)
Index Market Size* AuM in the Asset Category (in % of Market Size)**
*Market size of EM HC Sovereign is equivalent to the market capitalization of the J.P. Morgan EMBI Global Diversified. For EM HC Corporate this corresponds to
the market capitalization of the J.P. Morgan CEMBI Broad Diversified and for EM LC we consider the J.P. Morgan GBI-EM Global Diversified.
**AuM of the asset category is based on Morningstar’s classification.
Source: Vontobel Asset Management, Morningstar, Broadridge, J.P. Morgan, as of 30.11.2019.
21
For institutional investors only / not for public viewing or distribution
There is «poor liquidity» in this asset class, correct?
…leads to larger/more liquid bonds…
43%
24% 33%
17%
22%
62%
0%
10%
20%
30%
40%
50%
60%
70%
< 300 MM 300-500MM 500MM+
Perc
en
tag
eo
f T
ota
l Is
su
an
ce
Vo
lum
e (
acro
ss issuance
siz
e)
Before 2008 After 2008
Asset class growth of EM Corporates…
Source: J.P. Morgan, as of November 2019 (l.h.s.). Calomiris et al., “Search for yield in large international corporate bonds: investor behavior and firm responses”,
as of June 2019 (u.r.h.s.). Vontobel Asset Management, as of January 2020 (r.h.s.).
408
490
582 7
84 9
61
1.1
27
1.0
41
1.1
10
1.2
61
1.3
74
1.4
83
197 2
19 2
79
323
419
507
621 7
04
815 7
87
896
0
500
1.000
1.500
2.000
2.500
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Bo
nd
sto
ck (
in U
SD
bn)
Investment Grade High Yield & Non-rated
Overview
Why now? The 7 Goals
Market Outlook
Frequently Asked Questions
Conclusion
23
For institutional investors only / not for public viewing or distribution
Conclusion: EM Corporates have all the attributes of an absolute return strategy!
High
Yield
Low
Duration
Low
Default Risk
Well
diversified
Low
Volatility
Limited
Drawdowns and
Performance
Convexity
Decorrelated
01 03 05 07
02 04 06
24
For institutional investors only / not for public viewing or distribution
Disclaimer
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distribution in Argentina and Uruguay.
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For institutional investors only / not for public viewing or distribution
Disclaimer
This marketing document was produced for institutional clients, for distribution in AT, CH,
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This document is for information purposes only and does not constitute an offer,
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