For Qualified Investors only
COMMITTED TO YOU
Hamburg, 20. SEPTEMBER 2013
UBP Emerging Markets Fixed Income Emerging vs. Developed Markets Corporate Bonds Denis Girault, Head of UBP EM Fixed Income Union Bancaire Privée, UBP SA | Bahnhofstrasse 1| 8022 Zurich, Switzerland
Executive summary
Fundamental investment case for EM fixed income: –
Emerging Markets already account for 50% of World GDP and continue to grow significantly faster than developed markets
–
Diversified asset class across countries & currencies, sectors, issuers and credit quality
Emerging corporate bonds offer exposure to EM growth story: –
Market volume in excess of USD 1000bn, already bigger than EM sovereign bond market
–
More than 70% of tradable universe rated investment grade
–
Dynamic new issues market enabling broad diversification across countries & sectors
–
Exposure to EM corporate growth story with much less volatility than EM equity
Higher return with same risk as developed corporates: –
Low default rates and stable ratings
–
Higher long-term return potential than developed market bonds
–
Higher yield: 70-350bp for emerging over developed market corporate bonds.
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Emerging Markets positive long-term macro trend A long history of sovereign rating upgrades JPM EMBI Global rating development 100 Not Rated 90 August 2013: 73% Investment Grade 27% High Yield & NR
80 B-Rated 70 60 50 BB-Rated 40 30 20
Investment Grade (BBB- and higher)
10 0 01.98
01.99
01.00
01.01
01.02
01.03
01.04
01.05
01.06
01.07
01.08
01.09
01.10
01.11
01.12
01.13
Source: JP Morgan, UBP, 31.08.2013
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Global economic outlook Emerging growth story intact after recent IMF revision 8
IMF GDP forecasts (%yoy)
The IMF lowered growth forecasts for emerging and developed markets in July 2013.
EM forecasts were reduced moderately more than DM growth numbers.
Emerging markets are still forecast to grow significantly faster than developed markets.
Recent signs of stabilisation (eg China) after turbulent summer.
7 EM average GDP growth 2013 - 2016: 5.6% 6
5
4
3
DM average GDP growth 2013 - 2016: 2.1%
2 Emerging Markets Apr-13 Emerging Markets Jul-13
1
Developed Markets Apr-13 Developed Markets Jul-13 0 2012
2013
2014
2015
2016
Source: IMF, UBP, 31.07.2013
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Emerging fixed income universe Main segments EM sovereign
EM corporate
EM sovereign local currency
Hard (USD, EUR)
Hard (USD, EUR)
Local (eg BRL, MYR, RUB)
Market cap (USD bn)
583
1016
884
No countries
67
53
16
Yield to call / maturity (%)
5.22
5.43
6.92
Mod Duration
6.36
4.96
4.67
Coupon (%)
6.26
5.71
6.89
Spread vs BM (bp)
306
370
453
BBB-
BBB
BBB+
Currency type
Ave Rating
Source: JP Morgan, BofA Merrill Lynch, UBP, 31.08.2013
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UBP Emerging Market Fixed Income views Which segment for what investment objective? 1.
2.
Mitigate exposure to US Treasury rate fluctuations: •
EM High Yield Corporate
•
Duration hedged shares (sovereign & corporate)
Reduce credit risk in portfolio: •
3.
4.
EM Investment Grade Corporate
Exploit current yield levels to benefit from superior long-term return prospects: •
EM Sovereign
•
EM Corporate HY & IG
Exploit long-term EM FX appreciation potential: •
EM Local Currency
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New issuance Emerging corporate issuance four times the size of EM sovereign 350
EM bond market hard currency new issues (USD bn)
329.0 314.8
300 EM corporate (Hard currency) 250
EM sovereign (Hard currency) 210.7
202.5
200 153.1 150
136.6 120.7
100
93.3 82.8
79.9
71.3 58.8 55.2 50.0
69.9
76.4
73.6 56.5
19.7
23.0
21.4
76.4
61.0
57.7 39.0
50
82.4
75.0
27.6
0 2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013 FC
Source: JP Morgan, UBP, 16.09.2013
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EM corporate new issues by region and rating Mostly investment grade rated issues well diversified across regions 400
350
Corporate bond new issues by region (USD bn) 329.0
120%
Corporate bond new issues by rating
100% 314.8 High Yield & NR; 22.3%
300 Asia; 124.5
250
Asia; 119.7
60% Asia; 92.1 Latam; 99.9
Latam; 75.5
40%
Latam; 56.6
100
50
High Yield & NR; 26.5%
80% 240.2
200
150
High Yield & NR; 30.1%
EMEA; 104.7
EMEA; 81.1
EMEA; 109.8
Investment Grade; 77.7%
Investment Grade; 69.9%
Investment Grade; 73.5%
20%
0%
0 2012
2013 ytd
2013 FC
2012
2013 ytd
2013 FC
Source: JP Morgan, UBP, 16.09.2013
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Market capitalization Emerging corporate has overtaken sovereign market 2500
Market value hard currency bond markets (USD bn)
1988.1
2000
1500 1223.8 1016.0 1000
583.2 500 318.6
0 Euro Corp HY
EM Sov
EM Corp
US Corp HY
Euro Corp IG
Source: BofA Merrill Lynch, UBP, 31.08.2013
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EM corporate bond market offers ample size and depth... Key metrics of emerging corporate bond market As at 31.08.2013
Total universe
High Grade only
High Yield only
1016.0
742.5
273.5
53
31
47
Issues
1487
919
568
Yield (YTW %)
5.43
4.25
8.64
Gov’t Spread (bp)
370
246
706
Mod Duration (years)
4.96
5.33
3.93
Coupon (%)
5.71
4.91
7.76
Average Rating
BBB
BBB+
BB-
Market value (USD bn) Countries
BofA Merrill Lynch indices: Total universe: Emerging Markets Corporate Plus (EMCB) High Grade only: High Grade Emerging Markets Corporate Plus (EMIB) High yield only: High Yield Emerging Markets Corporate Plus (EMHB) Source: BofA ML, UBP, 31.08.2013
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...to build diversified portfolios across all areas Breakdown of emerging corporate bond market by main areas Region
Sector
Asia 35%
Latin America 34%
Services 4% Capital Goods 4% Real Estate 4%
Rating
Other 10% Energy 24%
Utility 6%
Eastern Europe 19%
Agency 7%
10-20Y 2%
A+ 7%
Banking 23% Basic Industry 12%
>20Y 7%
1-3Y 19%
A 7%
BB+ 6%
Telecom 6%
Middle East & Africa 12%
B+ BB- 4% 5% BB 3%
Maturity
CCC to C 1% BB 2% AAA to AA 5% 8%
A7%
BBB15%
7-10Y 28%
3-5Y 30%
BBB+ 13% BBB 17%
5-7Y 14%
Emerging Markets External Corporate Plus Index (EMCB) Other sectors: Automotive, Consumer Cyclical, Consumer Non-Cyclical, Financial Services, Government Guaranteed, Healthcare, Insurance, Local Authority, Media, Technology & Electronics
Source: BofA ML, UBP, 2Q 2013
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Low default rate Emerging bonds with lower default rates than developed market bonds 2.0
14.0
Investment Grade Corporate Default Rates (12-month trailing)
1.8
High Yield Corporate Default Rates (12-month trailing) 12.0
1.6 Emerging Markets
10.0
1.4
US
1.2
Emerging Markets
1.0
US
0.8
Europe
8.0
Europe
6.0
0.6
4.0
0.4 2.0
0.2 0.0
0.0 2005
2006
2007
2008
2009
2010
2011
2012
Mar-13
2005
2006
2007
2008
2009
2010
2011
2012
Mar-13
Source: Standard Poor’s, 30.04.2013
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Stable ratings EM issuer ratings as stable as peers in the US and Europe
Emerging Market Corporate
US Corporate
European Corporate
Likelihood of BBB rated issuer still BBB in 1 year
86.0%
85.3%
82.9%
Likelihood of BB rated issuer upgraded to BBB in 1 year
5.3%
5.1%
4.7%
3.7%
4.1%
4.2%
Likelihood of BBB rated issuer downgraded to BB in 1 year
Average 1-year corporate transition rates, Standard & Poor’s, 1981-2012
Source: Standard Poor’s, 30.04.2013
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Better long-term performance Emerging corporate bonds outperforming US and EMU 250
350
Investment Grade Corporate Bonds (Total Return)
High Yield Corporate Bonds (Total Return)
230
300
210
Total return since 2002 EM Corporate HY +181.4% US Corporate HY +170.9% +175.0% Eurozone Corporate HY +154.5% Eurozone Corporate ex Financials
190
250 170 150
200
130
150
110 EM Corporate IG US Corporate IG Eurozone Corporate IG Eurozone Non-Financial IG
90 70
Total return since 2002 +117.9% +96.6% +76.3% +87.0%
100
Re-based 31.12.01 = 100
Re-based 31.12.01 = 100
50
50 '02
'03
'04
'05
'06
'07
'08
'09
'10
'11
'12
'13
'02
'03
'04
'05
'06
'07
'08
'09
'10
'11
'12
'13
Bank of America Merrill Lynch benchmark indices Source: BofA ML, UBP, 31.08.2013
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EM corporate bond yields back to pre-crisis levels... ...offering good value vs US and Eurozone corporates 14
6.0
EM investment grade corporate bond yields (%)
12
Investment Grade Corporate Bond Yields (%) Spreads EM vs US: 74bp EM vs Euro: 207bp
5.0
10 4.0
8
6
3.0
Average 2003 - 2005 40-50bp
2.0
4
1.0
2
0 2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
0.0 01.10
Mod Duration (to worst) EM Investment Grade 5.33 US Investment Grade 6.42 4.41 Eurozone Investment Grade 4.79 Eurozone Non-Financial Investment Grade
07.10
01.11
07.11
01.12
07.12
01.13
07.13
Source: BofA Merrill Lynch, UBP, 09.09.2013
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EM HY bond yields above pre-crisis levels... ...offering significant yield enhancement over US & Europe HY 30
EM high yield corporate bond yields (%)
14.0
High Yield Corporate Bond Yields (%)
12.0
25
10.0
20 8.0
15 6.0 Spreads EM vs US: 232bp EM vs Euro: 346bp
10 4.0
200bp 5
2.0
0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
0.0 01.10
Mod Duration (to worst) 3.91 EM High Yield 3.92 US High Yield 3.01 Eurozone High Yield 3.07 Eurozone Non-Financial High Yield 07.10
01.11
07.11
01.12
07.12
01.13
07.13
Source: BofA Merrill Lynch, UBP, 09.09.2013
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EM corporate vs. equity Exposure to EM corporate growth story with much less volatility 450
EM Corporate vs Equity (Total Return) 400
350
300
250
200
150
100 EM Corporate (JPM CEMBI Div) 50 EM Equity (MSCI EM)
Re-based 31.12.01 = 100 0 '02
'03
'04
'05
'06
'07
'08
'09
'10
'11
'12
'13
Source: JP Morgan, UBP, 31.08.2013
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UBAM EM corporate bond funds Core investment range of our listed funds
Core investment
Key investment features
EM Corporate Bond
Global EM Credit BB/BBB range
Proxy for EM growth and EM equity with lower downside risk Credit asset allocation across entire EM corporate universe Credit re-rating Diversification and higher yield
EM Investment Grade Corporate Bond
Global EM IG Credit BBB range
Only investment grade bonds Credit re-rating Diversification and higher yield Addition/substitution to developed market credit portfolio
EM High Yield Short Duration Corporate Bond
Global EM HY Credit B+/BB- range
Higher yield Diversification Short Duration 20% HY CDX as liquidity cushion
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Positive outlook for EM corporate bonds Our track record – investing in EM corporates since 2007
190
EM corporate bonds enable participation in superior long-term EM growth story.
UBP EM Corporate Bond Track Record
180 170 160
UBP EM corporate bond performance
150
Higher return with same risk as US and European peers.
JP Morgan CEMBI Diversified
140 130 120
UBP EM corporate bond performance: corporate bond carve out from UBAM Emerging Market Bond chained with UBAM - Emerging Market Corporate Bond since August 2010.
110
Superior return potential due to structural allocation shift to EM corporate bonds.
100 90 80 70
UBAM - Emerging Market Corporate Bond
Carve-out
60
07.13
01.13
07.12
01.12
07.11
01.11
07.10
01.10
07.09
01.09
07.08
01.08
07.07
50 01.07
Source: JPM, UBP, 31.08.2013
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Appendix
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UBP Emerging Markets Fixed Income Active managers with high emphasis on risk and liquidity
Active managers the main return drivers (credit, rates, FX, portfolio beta) across the entire spectrum of global EM fixed income (sovereign, corporate, local currency)
Transparent and efficient investment process with high emphasis on risk management and liquidity
Integrated top-down and bottom-up research process using proprietary macro and asset valuation models
Bespoke investment solutions for institutional investors in Switzerland and abroad and Luxembourgregistered UCITS mutual funds
A highly experienced and integrated team of eight investment professionals from research to portfolio management and trading. The senior members of the team have more than 18 years experience on average.
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UBP Emerging Markets Fixed Income Team organisation Denis Girault Head EM Fixed Income EM Sovereign Jean-Dominique Bütikofer Deputy Head EM Fixed Income Portfolio Manager Macro & FX research Will Nef Portfolio Manager Macro & FX research Zsolt Papp EM Economist Investment Specialist
EM Corporate Denis Girault Head EM Corporate Portfolio Manager Olga Budovnits Senior Credit Analyst CEE, CIS & MEA
Risk analytics & FX hedging* Benjamin Dubois Head Currency Management Sébastien Thévoz Portfolio risk analytics and quantitative analysis
Nuria Jorba Senior Credit Analyst Americas Bruno Sonderegger Credit Analyst Asia
*Shared resource
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UBP Emerging Markets Fixed Income Short CVs Experience Total / UBP
Who
Previous experience
Denis Girault
21 / 6
Senior DCM, research and risk management positions at Merrill Lynch and Barclays Capital in Hong Kong & New York High Yield Credit Analyst at Moody’s Investors Service in New York MBA University of Louvain, Master of Economics University of Strasbourg
Jean-Dominique Bütikofer
18 / 7
Head of EM Fixed Income Asset Management at Julius Bär UBS EM Bond Trading Master of Economics University of Neuchâtel, CFA Charterholder
Will Nef
11 / 2
EM Fixed Income Fund Manager F&C Investments London UBS Global Asset Management (G10 FX), LODH (FoF) Degree in Business Administration University of Applied Sciences St Gallen, CFA Charterholder
Nuria Jorba
9/3
EM Fixed Income Analyst positions at Commerzbank and DrKB Joint degree in Law and Economics from University of Barcelona
Olga Budovnits
11 / 2
EM Fixed Income Analyst at Morgan Stanley and Fitch Ratings Moscow Financial Management Degree State University of Management (Moscow)
Fabio Fregna
7/7
Interest rate derivatives trader UBP treasury, Alternative Investments Portfolio Manager (intern) UBP MSc Finance, University of Lausanne, CFA III candidate
Bruno Sonderegger
5 /