EQUITIES | FIXED INCOME | PROPERTY
Aberdeen Emerging Market Debt
A meticulous approach to fixed income
As emerging economies expand, governments and companies alike are looking to domestic and international
capital markets to finance growth. These buoyant markets present skilled fixed income managers with plentiful
opportunities to identify, and benefit from, improving credits and countries.
FOR PROFESSIONAL USE ONLY - NOT FOR USE BY PRIVATE INDIVIDUALS
Advantages of emerging
Historically, investors seeking exposure to
the rising growth, domestic consumption
and economic stability of the emerging
markets have been rewarded for holding
equities, rather than bonds. When measured
over 15 years, however, emerging market
debt has not only beaten the equity index
on an annual basis, but also all of the major
American fixed income sectors, including
treasuries, corporate bonds and high yield.
One of the basic factors in deciding whether
to invest in emerging markets debt is what
risks are acceptable. These markets offer a
mix of sovereign, municipal, corporate and
structured debt just as developed markets
do. Offerings are divided into domestic
and external, with the former being local
currency issues and the latter denominated
in U.S. dollars or another developed currency.
Bond market growth has come from a
number of sources, including a proliferation
of new issues, particularly from companies,
and an increase in the number of countries
able to tap the international sovereign and
corporate debt markets. These countries,
many of which now sport investment grade
credit ratings, have a colourful past that
tells the story of how emerging market debt
came to its present form.
Investors’ interest is also driven by the low
correlation that emerging markets show
to the developed ones: this suggests that
they have a valuable role to play in portfolio
diversification as shown in Chart 3.
Other arguments for investing in emerging
market debt are broadly the same as those
for investing in the region’s equity markets.
Emerging economies have thrived in recent
years and many governments now have
lower budget deficits and debt-to-GDP
levels than those in the developed world.
Some have even accumulated large account
surpluses and are now net creditors. The
growth of currency reserves, combined with
fewer liabilities, has allowed more than half
of the emerging market countries to achieve
investment grade status, an improving trend
which seems set to continue.
Global Emerging Markets (GEM) have been on the march. A few years
ago this seemed improbable: damaging economic policies and too
much debt led to crisis in Russia, Asia and Latin America, driving away
foreign investors. Today more stable governments, structural reforms and
booming demand for raw materials and goods are transforming GEM
fortunes. High growth rates are being achieved.
The emerging market debt universe has expanded fast as these
countries’ economies mature and their fiscal policies strengthen them
further. The breadth and depth of the fixed income category has grown
over time and emerging market debt has become a viable asset class of
Key factors driving the sector include record prices for oil and other
commodities such as copper and gold are raising investment and output.
Tough, no-nonsense economic medicine is restoring confidence and
creating jobs, with privatisation widely accepted.
The emerging market debt universe has grown over the past 13 years
from US$1 trillion to more than US$7 trillion today. But despite an
impressive long-term performance record, the asset class rarely features
in many investors’ portfolios, so it’s clear that the potential for growth
presents an outstanding opportunity set over the medium- to long-term.
Chart 1: Emerging Markets - marching towards investment grade
Market Capital Weighted Rating
1996 1997 1998 1999
Source: ML IGOV index, July 2007
Emerging markets now the major
engine of global growth
The economic health of the emerging nations
has improved significantly over recent years.
These strengthened economies have been
helped by booming demand for commodities
and rising export revenues, all of which are
reflected in their dominant contribution to
global GDP growth. Indeed, GDP growth in
emerging market economies has exceeded
growth in the developed economies in each of
the last 11 years 1 .
Economic reform is another significant factor
in the area’s recent success: the adoption
of prudent fiscal and monetary policies
by governments has fostered stability and
growth, boosting economic fundamentals.
Inflation is now moderate by historic
standards, and many emerging nations now
run positive current account balances.
Emerging countries also has an extremely
favourable demographic picture, with younger
populations relative to more developed
countries. These growing workforces will drive
domestic consumption and, ultimately, fuel
All of which means that the pace of growth in
emerging markets is expected to continue at
a level about twice that of developed markets,
according to IMF projections, so it’s clear that
there is a robust forecast of economic growth
to support the investment case.
• Inflation is moderate by historic
• Many countries have positive current
• About 65% of the world’s hard currency
reserves are held by emerging market
The economic picture has rarely been better
for emerging markets and the major indices
over the last five years reflect this clearly.
Strong domestic and export-led growth, along
with booming working populations, are set
to benefit almost every sector of emerging
At the same time, populations are becoming
increasingly urban, thanks to industrialisation
and the emergence of the middle class.
In countries such as China and India,
metropolitan areas are already growing
strongly. These conditions should translate
into a good level of growth in returns from
debt instruments in the long run.
During the period from 2002 to 2007, many
domestic bond issues performed relatively
well because local currencies had appreciated
versus the dollar. That could always change,
however, and currency fluctuations add an
extra element of risk to emerging market debt
Chart 2: Strong returns — all part of Aberdeen’s heritage
Source: Composite: Emerging Markets Debt – Plus (USD denominated) (EMDebt).
Benchmark: JPM EMBI Global Diversified.
Base currency: US dollar (reported in local currency). Gross returns as of: 31 Dec 07
Chart 3: Emerging market bonds typically show low correlation
with other asset classes
Annualised Composite Return
Composite return gross
JP Morgan EMBI+
5 years Since inception
Citigroup WGBI (USD)
FTSE AW Europe (GBP)
Why Aberdeen for Emerging Market debt
Emerging Market Debt (EMD) has remained one of the best performing asset classes for over 10 years, despite high profile crises. As part of
a broader portfolio, EMD has the potential to enhance returns, providing diversification benefits for investors. We believe that most investors
should at least allocate a modest holding to emerging debt, while investors more tolerant of risk should consider a more significant holding.
To maximise alpha potential we review the entire emerging markets debt universe: sovereign and corporate, hard and local debt, credit
derivatives and foreign exchange. Successful investment in emerging market debt requires strategic fundamental research coupled with analysis
of market technicals.
As a result, we currently research over 40 countries, looking at key macroeconomic variables, the political environment, fiscal and monetary
policy developments, and major risk. And to complete this picture, our team meets with more than 100 senior policy makers annually.
For corporate securities, we only invest in companies where we hold a favourable outlook for the sovereign creditworthiness. We also focus only
on transparent, well managed companies with robust business models.
What this means, is that Aberdeen has an excellent record of performance. As a leader in emerging markets, we have well-resourced investment
teams in London, Singapore, Bangkok and Kuala Lumpur capable of rapid decision-making and trade implementation, and as a business we now
manage assets in emerging market debt worth in excess of US$5.6bn 2 .
Source: IMF, April 2007. Covers period 1995-2006
Source: Aberdeen Asset Management, 31 December 2007. Specialist EMD mandates = US$3.9bn. EMD assets carved out from other mandates = US$1.7bn
An investment process that works
Culturally, Aberdeen has a genuine team
approach where decisions are made
collectively — we definitely don’t believe
in ‘star’ managers. As a result, we have an
enviable record with our Emerging Market
mandates thanks, in part, to our competitive
performance, superior client servicing and
A clear and consistently-applied methodology
suits our style: Aberdeen’s distinct, proven,
and well-documented investment process
draws on high quality proprietary research
to generate added value by identifying the
instruments that are most likely to perform
well over time.
This is backed by Aberdeen’s trademark:
independent thinking. We pay little attention
to consensus and we never rely on the
direction taken by our peers or the benchmark.
Instead we prefer to trust our own research
and take a long-term view in everything we
Finally, and most importantly, our Emerging
Market debt team has a wealth of experience
in the region across a broad swathe of
disciplines which include asset management,
hedge fund management, research and
trading. We believe that this — combined
with an unconstrained and opportunistic
approach — gives us peerless ability to unlock
value for our clients.
How emerging market debt reacts to
continued uncertainty in the markets, or
even an American recession, over the coming
months will give an indication of just how
self-sufficient countries in the region have
become. Many emerging economies are
undoubtedly in a better position than they
were a decade ago, with lower budget deficits
and better credit ratings. Inflation in the
region has fallen dramatically and currencies
appear to be on a long-term course of
appreciation against the dollar.
Emerging market debt has come a long way
in recent years: improved legal, regulatory and
economic climates within many countries
in Asia, Latin America, Eastern Europe and
elsewhere have brought a measure of
stability to this market. As Chart 4 shows,
there has been a significant shift in the
relative importance of sovereign debt against
corporate over the last decade, so a detailed
understanding of how markets evolve and how
they will continue to develop is a critical skill
for successful EMD managers.
Chart 4: Corporate debt has quadrupled in value in a decade
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007E*
Source: JPMorgan. US$38 billion in 2007 sovereign insurance includes
US$7 billion pre-financed in 2006
At Aberdeen, the common thread — whether
it’s with our equity or debt ranges — is a
focus on good fundamentals at a country
and corporate level. Our analysis begins
with country research in the context of
global economic development. We then
look at macroeconomic factors, institutional
frameworks and the effectiveness of policymaking.
And because traditional risk management
tools do not always work in emerging markets,
we construct our own forward looking
expectations of risk and volatility. Finally, and
in keeping with our reputation as a strong
bottom-up manager, we believe that the
best way to manage emerging market debt
is by being benchmark-aware, rather than
Our models are designed to capture forwardlooking
scenarios, taking into account
domestic capital market developments such
as supply-demand factors, yield curves and
maturities. From these investigations we can
identify where mispricing exists and which
instruments are likely to deliver the exposure
we are looking for.
Head of Emerging Market Debt
“As the creditworthiness
of emerging countries
has improved, so has
their ability to issue debt
in their own currency.
local currency bonds
are now being offered,
providing funds with
diversification from their
holdings as well as
Emerging market bonds
also tend to have a
low correlation to
other assets, implying
a reduction in overall
Insight from the road - Aberdeen’s investment process in action
The best way to illustrate the way we approach the investments we make is to take a look at a country we believe offers good
prospects for 2008. Aberdeen’s team recently visited the Turkish cities of Istanbul and Ankara where they found policy makers who
were comfortable with inflation falling, and with the prospect of interest rate cuts, both of which are positive for the local bond
market where bond yields are over 15.5%.
In more detailed discussions with the Turkish banking sector, the team discovered that local investors have remained cautious with
their Turkish Lira holdings, preferring instead to hold US Dollars and Euro positions. The insight provided by these on-the-ground
meetings gave the team the added confidence to build up significant Turkish Lira positions.
Aberdeen’s investment philosophy of ensuring that in-depth research is always carried out before an investment is made means
that the team makes a point of meeting not only the issuers in the marketplace, but also end-investors. Aberdeen’s Head of
Emerging Market Debt, Brett Diment, believes other managers are sometimes guilty of overlooking this essential part of the process,
perhaps because it demands on-the-ground representation at local market level.
Aberdeen’s EMD team always thinks about risk: when we are analysing the return prospects we don’t just look at the upside but
also the downside and we formally forecast the downside risk for any given position.
And finally, as investors, we know that we’re going to get some of our investments wrong. However, by the same token we also
know that what matters is building a well-diversified portfolio that performs well over the long term, so out of perhaps 20 countries
that we like at any given point in time, the top holding will probably represent no more than 15% of the total.
The five key pillars of Aberdeen’s EMD philosophy and process
Top quality research is the key to added value
• Independent proprietary research; detailed research notes completed for each credit
• Focus on country and corporate fundamentals, market structural analysis
• Analysis of entire emerging market universe; hard & local currency sovereign debt, foreign exchange, corporates and credit
Application of a rigorous, risk controlled investment process generates superior returns
• Focus on forward looking scenarios
• We believe historic volatility and correlation are not good predictors of risk
Leverage off wider fixed income platform
• Global macro teams; information advantage through regular interaction with Global Interest Rates and Currency specialist
• Global corporate teams; expansive investment universe researched by investment grade credit teams in London, Philadelphia
and Singapore, and a specialist high yield team
Range of product types
• Core and Core Plus, closed end funds, long/short
Experienced and dedicated team
• Our EMD team has a total of over 35 years combined experience in the asset class across a series of functions in the industry
including asset management, hedge fund management, research and trading.
For more information please contact:
Aberdeen Asset Managers Limited
One Bow Churchyard
Telephone: +44 (0)20 7463 6000
Aberdeen Global - Emerging Markets Bond Fund
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