Aberdeen Global II - Self Bank

Emerging Markets Fixed Income AlphaFor the year ended 30 June 2011PerformanceFor the year ended 30 June 2011, the value of Emerging MarketsFixed Income Alpha - Z Accumulation shares increased by 9.99%compared to an increase of 2.19% in the benchmark, CitigroupWorld Government Bond Index USA.Source : BNP Paribas, Total Return, USD.Manager’s reviewEmerging market debt posted strong gains during the one-yearperiod to the end of June 2011. The period under review started wellfor emerging market debt thanks to slower global growth data anddeclining US Treasury bond yields. However, mounting concerns overperipheral eurozone members, along with rising US Treasury yields,had a negative impact on the emerging market assets heading intoyear end 2010. Rising global headwinds also weighed on emergingmarket debt heading into 2011, cumulating in the risk aversion trenddue to fear of Greek default towards the end of the period underreview. The Citigroup WGBI US Index ended the one-year periodwith a gain of 2.19%, while the Fund outperformed with a gain of9.99%.Rising inflation concerns amid heightened commodity prices, inparticular those related to food, put severe pressure on developingeconomies in late 2010, which in turn weighed on asset prices. Thiswas exacerbated somewhat by a spike in oil prices following theuprisings in North Africa and the Middle East in Q1 2011, althoughpressures have eased in recent months due to increased confidencesurrounding global oil supplies. Emerging market debt recordedstrong performance as inflation pressures eased and concerns aboutJapan following the earthquake and tsunami also faded. Toward theend of the reporting period the focus shifted to weak growth figuresfrom the US and fears about a Greece default, which dampened riskappetite. Greece managed to pass the austerity bill at the end ofJune, paving the way for the next €12 billion of its EU-IMF bail-outpackage, prompting a brief rebound in risk appetite.Country NewsIn Brazil, the Central Bank has been raising interest rates, whichreached 12.25% at the end of the period under review, in an effortto combat inflation which has been persistently above the official4.5% target. Meanwhile, the continued strength of the Brazilianreal and rising currency inflows (US$35bn in Q1 2011) promptedBrazil to introduce further macro prudential measures to stemappreciation pressures on the Brazilian real, extending the IOF tax(Tax on Financial Operations) of 6% to all external borrowing with amaturity of up to two years from one year previously, and increasingthe IOF tax on credit to households, which includes credit card anddirect consumer credit, to 3% from 1.5%.Mexico is another country that has not been immune to risinginflation pressures, although they are mild in comparison to the likesof Brazil and China. The other significant news was Mexico’s requestfor a larger, and longer contingent credit line from the IMF.The 2-year, US$73 billion FCL would replace the current 1-year,US$47 billion credit line that was originally taken out in 2009,during a fragile period for global financial markets. Mexico isarguably in a much stronger position today compared to 2009, withgrowth rebounding, but seeking added insurance is a prudent move,and should be supportive for the peso.Argentina has addressed one of its key outstanding issues that, ifsuccessful, will enhance an improving credit story. Discussions withthe Paris Club to work out a repayment of longstanding arrears,which are now close to US$ 8 billion, commenced in December,with Economy Minister Boudou stating the negotiations will havetwo stages. The first stage will involve the reconciliation betweenthe two parts of the exact amount Argentina owes the Paris Club.The second stage will involve the negotiation proper of a repaymentplan. Clearing of Paris Club arrears will allow government-ownedexport credit agencies to provide insurance coverage, which in turnwould help attract foreign investment from the private sector.However, no breakthrough in talks is expected before Octoberpresidential elections.Chinese growth indicators moderated with the People’s Bank ofChina embarking on a series of tightening measures which beganwith a much-awaited interest rate hike on Christmas Day. Whileinflation pressures are persisting due to rising commodity prices, therecent deceleration in monetary growth, along with slowing creditgrowth, have reduced the need for a drastic liquidity tighteningwhich should ease any concerns about the risk of a sharp slowdownof growth. China’s softening growth indicators and elevated inflationlevels prompted further hikes of reserve requirement ratio (RRR). TheRRR has been increased by a total of 600 basis points since the startof 2010. We continue to view the soft landing scenario as a highprobability, with 2011 growth likely to be closer to 8.5% than thecurrent consensus of around 9%.Portfolio reviewThe Fund outperformed its benchmark over the period under review.Within the hard currency-denominated holdings, Argentina andKazakhstan were the main contributors to performance while thePhilippines and Ivory Coast detracted from performance. Withinlocal currency-denominated bonds, exposure to Brazil, Mexico andSouth Africa added the most value. Over the year, positions inPoland and Russia detracted from performance.OutlookHow long the Greek crisis will persist depends on several events: theEU plan on private sector involvement to extend maturities on Greekdebt coming due in 2012-14, and the willingness of the IMF/EU toagree to a further US$150bn bailout package for Greece to coverthe financing gap over the next three years. Once those hurdles arecleared, the focus will shift to implementation risk, which will remainvery high. In the meantime, some calmer waters for Greece will besupportive for emerging market debt.36 Aberdeen Global IIEmerging Markets Fixed Income Alpha