Portfolio Manager Samy Muaddi, CFA, discusses his perspective on the current emerging markets debt environment and what investors could expect to see in 2017.
2. 2
Emerging Market Vulnerabilities Have
Structurally Declined
Developed Countries
Mainstream Emerging
Countries and Second-
Tier Countries
Frontier Emerging
Countries
3. 3
Where Are We in the Cycle?
FOUR FACTORS TO CONSIDER
1 Fiscal
2 External
3 Social and Political
4 Private Sector
4. 4
Sources: T. Rowe Price and International Monetary Fund.
1. Fiscal Vulnerabilities Are Less Evident
Across Emerging Markets (EM)
$0
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
$140,000
$160,000
1990 1995 2000 2005 2010 2015
Millions—USD
HISTORICAL AMOUNT OF IMF
ASSISTANCE OUTSTANDING
Total IMF Loans Oustanding
Total Less Greece/Portugal/Ireland
20
30
40
50
60
70
80
90
100
110
120
130
2001 2003 2005 2007 2009 2011 2013 2015 2017
(F)
2019
(F)
%ofGDP
EM VS. G7 PUBLIC DEBT
2016–2019 forecast
Major Advanced Economies (G7)
Emerging Markets
5. 5
Sources: T. Rowe Price and Haver Analytics.
Current account balance chart is based on countries as follows: Mexico, Indonesia, Russia, China, Turkey, Brazil, Venezuela, Colombia, Chile, Hungary, South
Africa, Kazakhstan, Lebanon, Peru, Poland, Ukraine, Panama, Malaysia, Bolivia, Costa Rica, Ecuador, Guatemala, Paraguay, Uruguay, Jordan, Oman, Egypt, India,
Pakistan, Vietnam, Ghana, Ivory Coast, Kenya, Morocco, Nigeria, Tunisia, Azerbaijan, Belarus, Georgia, Slovakia, Latvia, Serbia, Lithuania, Croatia, Romania,
Dominican Republic, Bahrain, Iran, Israel, Qatar, Saudi Arabia, United Arab Emirates, Palestinian Territories, Bangladesh, Korea, Macau, Thailand, Algeria,
Botswana, Mauritius, Uganda, Albania, Kyrgyz Republic, Bulgaria, Czech Republic, Estonia, Slovenia, Macedonia, Bosnia and Herzegovina, and Kosovo.
2. External Vulnerabilities Have
Cyclically and Structurally Adjusted
-3.5%
-3.0%
-2.5%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1995 1998 2001 2004 2007 2010 2013 2016
CAasaPercentofGDP(SA,%)
EM CURRENT ACCOUNT BALANCE—
FOUR-QUARTER ROLLING AVERAGE
0%
10%
20%
30%
40%
50%
60%
1995 1998 2001 2004 2007 2010 2013 2016
Year-Over-YearChangeinCPI
EM INFLATION
6. 6
As of September 30, 2016
Sources: T. Rowe Price and CRB Rates.
2. The Monetary Policy Response
Function Is Increasingly Unsynchronized
May 2005 – June 2006
Interest rates up
Interest rates down
Interest rates upInterest rates stable
UK Eurozone
Russia
Australia
Canada
Philippines
South Korea
India
Indonesia
Mexico
U.S.
South Africa
2015
Brazil
77
cuts 66
hikes
Colombia
2016 YTD
58
cuts
31
hikes
ILLUSTRATIVE INTEREST RATE CYCLE
7. 7
Source: Peterson Institute, January 2016.
3. Global Trends in Wealth Accumulation
Favor EM Consumption
0
10
20
30
40
50
60
70
80
0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100
GrowthRateinPercentage
Percentiles of the Global Income Distribution
CUMULATIVE INCOME GROWTH RATE SINCE 1990s
POORER RICHER
8. 8
Sources: Images 1‒4 are public domain; Image 5: Creative Commons, www.kremlin.ru; Image 6: Creative Commons, Licurgo Miranda.
3. Markets Often Follow the Leader
UPCOMING CATALYSTS
China 19th party congress
Brazil pension reform
Venezuela resolution
Russian sanctions
African National Congress
(ANC) elective conference
Turkey constitution
Argentina parliamentary election
Ecuador general elections
Nigeria local elections
4
5
1
3
2
6
9. 9
Sources: T. Rowe Price, J.P. Morgan, Bank of America, Fitch Ratings, and Bank for International Settlements (BIS).
*For bond issuers.
4. Private Sector Contingent Liabilities
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
2008 2009 2010 2011 2012 2013 2014 2015 LTM
NetLeverage(exRealEstateandDefaults)
GLOBAL EM CORPORATE
NET LEVERAGE TREND*
EM Corp. Global
Asia
EM Europe
Latin America
Middle East/Africa
73%
13%
10%
4%
DISTRIBUTION OF EM CORPORATE
LEVERAGE BY SOURCE
Local Banks
Local Currency Bonds
BIS Claims
USD Bonds
10. 10
As of December 31, 2015
Sources: T. Rowe Price and Haver Analytics.
4. China’s USD $30 Trillion Dollar Problem
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
100.0
GLOBAL EM LONG-TERM HISTORY
OF CREDIT TO GDP (%)
All EM Mean
South America Mean
Central America Mean
CEE Average
Africa Mean ex SOAF
Mideast Mean
Asia Mean
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
GDPGrowth/NonfinancialPrivateSectorCreditGrowth
EFFECTIVENESS OF CHINA’S
CREDIT EXPANSION WEAKENING
11. 11
Where Are We in the Cycle?
FOUR FACTORS TO CONSIDER
1 Fiscal
2 External
3 Social and Political
4 Private Sector
12. 12
Emerging Markets Offer a Compelling
Yield and Duration Profile
As of September 30, 2016
Sources: T. Rowe Price, Bloomberg Barclays, J.P. Morgan, and MSCI.
Returns are in U.S. dollar terms. Benchmarks: J.P. Morgan EMBI Global, J.P. Morgan GBI – EM global diversified; J.P. Morgan CEMBI Broad Diversified, Bloomberg
Barclays European High Yield, Bloomberg Barclays, U.S. High Yield, Bloomberg Barclays U.S. Corporate Investment Grade, Bloomberg Barclays European
Corporate Investment Grade, Bloomberg Barclays U.S. Aggregate – U.S. Treasury; Bloomberg Barclays Global Aggregate ex U.S., Bloomberg Barclays Global
Aggregate – German bund; Bloomberg Barclays Global Aggregate – Japanese government bond.
U.S. Treasuries
AAA
U.S. IG Corporates
A-
U.S. High Yield
B+
EM Sovereign
Hard Currency
BB+
EM Corporate
BBB-
EM Sovereign Local
Currency BBB+
International Bonds
Euro IG Corporate
A-
Euro HY
BB
JGB
A+
Bunds
AAA
-2
0
2
4
6
8
3 4 5 6 7 8 9 10 11
Yield(%)
Duration (Years)
With more than USD $10 trillion in developed market sovereign debt offering negative yields,
emerging markets provide an attractive yield and duration profile alongside a history of
compelling long-term risk-adjusted returns.
13. 13
Emerging Markets Still Offer
Relative Value
As of October 31, 2016
Sources: T. Rowe Price and J.P. Morgan.
Major developed USD bond yields represented by the average of U.S., Germany, Japan, UK 5 and 10-year yields.
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
YieldDifferential(%)
YieldtoMaturity(%)
EM VS. DEVELOPED SOVEREIGN YIELD HISTORY
Differential (R)
EM Sovereign Bond Yields in USD
Average of Major DM Government Bond Yields
14. 14
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