Aberdeen Emerging Market Debt - Aberdeen Asset Management


Aberdeen Emerging Market Debt - Aberdeen Asset Management


Aberdeen Emerging Market Debt

A meticulous approach to fixed income

April 2008

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.


Advantages of emerging

market debt

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

its own.

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

economic growth.

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.

Market outlook

• Inflation is moderate by historic


• Many countries have positive current

account balances;

• 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

market economies.

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








1 year



2 years


S&P 500

3 years

4 years

Composite return gross


JP Morgan EMBI+




5 years Since inception

Benchmark return



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

operational transparency.

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.

Our thinking

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.

Brett Diment

Head of Emerging Market Debt

“As the creditworthiness

of emerging countries

has improved, so has

their ability to issue debt

in their own currency.

Attractive longer-dated

local currency bonds

are now being offered,

providing funds with

diversification from their

US dollar-denominated

holdings as well as

enhanced performance.

Emerging market bonds

also tend to have a

low correlation to

other assets, implying

a reduction in overall

portfolio risk.”

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

investment teams

• 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.

Further information

For more information please contact:

Aberdeen Asset Managers Limited

One Bow Churchyard




Telephone: +44 (0)20 7463 6000

Group Website:



Aberdeen Global - Emerging Markets Bond Fund

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Important Information

The above is strictly for information purposes only and should not be considered as an offer, or solicitation, to deal in any of the investments mentioned herein. Aberdeen

Asset Managers Limited (‘the Manager’) does not warrant the accuracy, adequacy or completeness of the information and materials contained in this document and

expressly disclaims liability for errors or omissions in such information and materials. Any research or analysis used in the preparation of this document has been procured

by the Manager for its own use and may have been acted on for its own purpose. The results thus obtained are made available only coincidentally and the information

is not guaranteed as to its accuracy. Some of the information in this document may contain projections or other forward looking statements regarding future events or

future financial performance of countries, markets or companies. These statements are only predictions and actual events or results may differ materially. The reader must

make his/her own assessment of the relevance, accuracy and adequacy of the information contained in this document and make such independent investigations, as he/

she may consider necessary or appropriate for the purpose of such assessment. Any opinion or estimate contained in this document is made on a general basis and is

not to be relied on by the reader as advice. Neither the Manager nor any of its servants or agents have given any consideration to nor have they or any of them made

any investigation of the investment objectives, financial situation or particular need of the reader, any specific person or group of persons. Accordingly, no warranty

whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of the reader, any person or group of

persons acting on any information, opinion or estimate contained in this document. The Manager reserves the right to make changes and corrections to

its opinions expressed in this document at any time, without notice. Issued and approved by Aberdeen Asset Managers Limited which is authorised and

regulated by the Financial Services Authority.

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