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Investing in Emerging Market Steven Yang Yu - Redington 02 December 2014

Investing in Emerging Market

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Investing in Emerging Market by Steven Yang Yu.

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Page 1: Investing in Emerging Market

Investing in Emerging MarketSteven Yang Yu - Redington

02 December 2014

Page 2: Investing in Emerging Market

What should you consider before

designing investment strategy?

02 December 2014

Page 3: Investing in Emerging Market

Begin with the end in mind

3

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2,400

GBP Millions

Assets:

£1.6bn

Assets:

£1.8bn

Required Return:7% per

year

Required Return: 5% per

year

Liabilities:

£2.3bn

Full Funding

(Assets =

Liabilities)

Return Requirement?

Risk budget?

Governance

structure?

Liquidity profile?

“All investment strategy starts with the clear

goals, objectives & constraints of the client,

including a defined and agreed risk budget”

- Redington Investment Principle

Page 4: Investing in Emerging Market

4

Achieving your end gameMeeting the Gap

Assets with

Cash FlowsSmooth Volatility

Liability Driven

Investment /

Hedging

Property Leases

Corporate Bonds

Developed Market Equity

Emerging Market Equity

Emerging Market Debt

Risk Parity

Multi-Asset

Infrastructure

Page 5: Investing in Emerging Market

Why Emerging Market?

02 December 2014

Page 6: Investing in Emerging Market

Capital Markets Under Represented

02 December 2014 6

Source: Neuberger Berman

7.0%

15.0%

41.0%

49.0%

64.0%

75.1%

82.9%

93.0%

85.0%

59.0%

51.0%

36.0%

24.9%

17.1%

0.0% 20.0% 40.0% 60.0% 80.0% 100.0% 120.0%

Debt Market Cap

Equity Market Cap (Float Adjusted)

GDP at Market Rates

GDP at PPP

Foreign Exchange Reserves

Land Mass

Population

Emerging Market Economies as % of Total World

Emerging Markets Developed Markets

Page 7: Investing in Emerging Market

Economic Contribution Continues to Increase

02 December 2014 7

Source: IMF World Economic Outlook, April 2014

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Countribution of GDP by Country

others Latin America Rest of EM Asia China Japan Developed Europe North America

North America (35% to 24%)

Developed Europe (27% to 23%)

Japan (13% to 6%)

China (4% to15%)

Rest of EM Asia (3% to 7%)

Latin America (5% to 7%)

Others (12% to 18%)

Page 8: Investing in Emerging Market

Rising Domestic Consumption

02 December 2014 8

4

6

8

10

12

14

16

18

20

% of Households with Disposable Income > $25,000 USD in China

2634

12

30

0

10

20

30

40

50

60

70

2010 2025

in $

Trilli

on

World Consumption Growth

Developed Market Emerging Market

Compound

Growth 2.0%

Compound

Growth 8.4%

Source: FundSmith

Page 9: Investing in Emerging Market

Healthy Balance Sheets

02 December 2014 9

0

20

40

60

80

100

120

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

General Government Gross Debt (% of GDP)

Developed Market Emerging Market

Source: IMF World Economic Outlook, April 2014

Page 10: Investing in Emerging Market

Growing Investment Universe

02 December 2014 10

EM Fixed Income Universe EM Equity Market Cap (USD Trillions)

Source: Ashmore

Page 11: Investing in Emerging Market

Which Asset Strategies?

02 December 2014

Page 12: Investing in Emerging Market

Passive Equity

02 December 2014 12

Source: MSCI

China20%

South Korea14%

Taiwan12%

Brazil10%

South Africa

8%

Other36%

MSCI EM – Sector Breakdown MSCI EM – Country Breakdown

Financials28%

Information Technology

17%

Energy10%

Consumer Discretionary

9%

Consumer Staples

8%

Materials8%

Telecom8%

Industrials6% Utilities

4%

Health Care2%

Page 13: Investing in Emerging Market

Passive Equity

02 December 2014 13

0

50

100

150

200

250

300

350

400

450

500

Developed vs Emerging Markets

MSCI World MSCI EM

Source: Bloomberg

Page 14: Investing in Emerging Market

Passive Equity

02 December 2014 14

0

50

100

150

200

250

300

350

400

450

500

FX carry explains some of EM Outperformance

MSCI World MSCI EM MSCI World + EM Currency

Equity

Outperformance

FX Carry

performance

Source: Bloomberg, MSCI

Page 15: Investing in Emerging Market

Active EquityHow do managers outperform?

02 December 2014 15

Top Down

Bottom Up

Macroeconomic

Thematic

Currency

Country

Sector

Stock-Specific-30.00%

-20.00%

-10.00%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

Russia Hungary MSCI EM Indonesia Egypt

MSCI EM Biggest Gainers and Losers,Q1-3 2014

Source: MSCI, JP Morgan, HSBC

Page 16: Investing in Emerging Market

Active EquityHigh variation in active returns

02 December 2014 16

-30

-20

-10

0

10

20

30

40O

utp

erf

orm

an

ce

re

lati

ve

to

MS

CI E

M (

%)

Last 5y Last 3y Last 1y

High 20.95 19.64 30.11

25th Percentile 3.91 4.43 3.73

75th Percentile 0.02 0.14 -1.52

Low -9.50 -7.94 -18.65

Index Return 10.43 7.63 11.05

Outperformance relative to MSCI EM

Source: eVestment Alliance, Returns are gross of fees

Page 17: Investing in Emerging Market

Emerging Market DebtFast growing market

02 December 2014 17

o Emerging market debt accounts for

c.25% of total global credit market size

($30trn total)

o 3 main types of investible debt:

JPMorgan EMBI: Hard currency

sovereign

JPMorgan GBI-EM: Local currency

sovereign

JPMorgan CEMBI: Corporates (hard

currency)

Mortgages/Securitised40%

Global IG Corporate

24%

Global High Yield11%

EM Debt25%

GLOBAL CREDIT MARKET

Source: Babson Capital, Bank of America, Barclays

Capital, Credit Suisse, SIFMA, as of end 2013

Page 18: Investing in Emerging Market

Emerging Market DebtGood diversification and credit quality

02 December 2014 18

Brazil, 27%

Mexico, 21%

Poland, 11%

Turkey, 8%

Malaysia, 8%

Russia, 6%

Africa, 10%

Other, 8%

REGIONAL SPLIT: GBI-EMAA6%

A19%

BBB48%

BB9%

B8%

C8%

NR2%

RATING SPLIT: EMBI GLOBAL

74%

Investment

Grade

Page 19: Investing in Emerging Market

Emerging Market DebtAttractive yields

02 December 2014 19

5.31%

6.54%

5.22%

3.67%

2.28%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

EM HardCurrency

EM LocalCurrency

US High Yield US IG Credit USGovernment

Yields to maturity as June 2014

0

100

200

300

400

500

600

700

800

900

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

OA

S (

bp

s)

Credit Spreads of EMD vs. Major Bond Markets

EMBI Global BAML US Govt & Corp

BAML US Corp BAML US Corp BBB

Source: MSCI, JP Morgan, HSBC, Neuberger Berman

Page 20: Investing in Emerging Market

20

Conclusions

• Structural economic growth

• Improving credit fundamentals and demographic trends

• Access to various source of returns

• Financial, geopolitical and currency risk remain

• Expanding investible universe for global investors

• Lack of research coverage

• Career opportunities in local markets