Brexit, Wahlen, Trump Quo Vadis Europa?...Emerging Markets in Dire Straits. 3 Lazard Asset...

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Details:

Werner Krämer, CEFAManaging Director,Makroökonomisches Research

Denise S. SimonManaging Director, Portfolio Manager/Analyst

Werner Krämer, Managing Director

6 September 2018

This presentation and all research and materials enclosed are property of Lazard Asset Management LLC. © 2018 Lazard Asset Management LLC

Information and opinions presented have been obtained or derived from sources believed by Lazard to be reliable. Lazard makes no representation as to their

accuracy or completeness. All opinions expressed herein are as of the date of this presentation and are subject to change.

Please see Appendix for additional important information about risks.

Emerging Markets in Dire Straits

3 Lazard Asset Management

Asset Class Performance Since 2009 and YTDEM in Dire Straits

As of 5 September 2018

Source: Thomson Reuters, Lazard

While the long run performance of most Emerging Markets strategies is very good,

2018 has been a difficult year until now.

1

Denise S. Simon,

Managing Director, Portfolio Manager/Analyst

6 September 2018

This presentation and all research and materials enclosed are property of Lazard Asset Management LLC. © 2018 Lazard Asset Management LLC

Information and opinions presented have been obtained or derived from sources believed by Lazard to be reliable. Lazard makes no representation as to their

accuracy or completeness. All opinions expressed herein are as of the date of this presentation and are subject to change.

Please see Appendix for additional important information about risks.

Emerging Markets Debt Insights


EMD: A Tale of Two Asset ClassesExternal EMD Has Delivered Steady Returns

As of 31 August 2018

Source: Bloomberg, JP Morgan

External EMD Index Total Return Local EMD Index Total Return

Bear Market

(04/30/12 – 01/31/16)

Recovery

(01/31/16 – 01/31/18)

Renewed Volatility

(01/31/18 – 08/31/18)

Full Period

(04/30/12 – 08/31/18)

External EMD (JPM EMBI GD) 3.54% 9.75% -4.45% 3.28%

Local EMD (JPM GBI-EM GD) -6.33% 14.40% -14.31% -4.06%

Performance (Annualized)

1 Year 3 Years 5 Years 10 Years

External EMD (JPM EMBI GD) -3.37% 5.05% 5.61% 6.64%

Local EMD (JPM GBI-EM GD) -10.05% 3.23% -1.33% 1.87%

2

6 Lazard Asset ManagementAs of 31 August 2018

Source: Lazard, JPM

External -4.5% (IG -2.0%; HY -7.1%), Corporate -2.5% (IG: -0.9%; HY -4.5%), Local -10.5% (FX -9.8%)

What’s Happened in 2018?

Timeline of Key Events Driving EMD Performance

Q1: Strong start for Local EMD while External lagged amid rising rates (External: -1.7%; Local: +4.4%)

Synchronized global growth

Surprise increase in US real wage growth sparks inflation concerns

10-year UST approaches 3% in February, a nearly 100 bps increase since the lows in September

Q2: EMD suffers its worst quarter on record (External: -3.5%; Local: -10.4%)

US leading indicators remain strong while European leading indicators decline, igniting USD rally

New Fed focused on domestic factors amid solid growth in US

Concerns over future of Eurozone as Italy fails to form coalition government

US announces fresh round of Russian sanctions

Run on Argentine peso following higher inflation and policy missteps

Rising trade tensions and announcement of tariffs between US and China

Q3: Short-lived rebound followed by renewed volatility (External: +0.8%; Local: -4.3%)

Chinese yuan depreciates by 8.5% over a period of two months

Spat with US and ensuing sanctions bring Turkey’s long-standing structural weaknesses and

vulnerabilities to light

Concerns over Brazilian presidential election and lack of a strong centrist candidate

3


Divergent Growth and Strong Dollar Weigh on EMUS Growth Has Decoupled from Rest of World


Source: Lazard, Haver Analytics, Bloomberg

Growth Differentials Have Increased (GDP Nowcasts) USD Has Strengthened (Broad USD Index)

Softening growth momentum in China and Europe, in the face of US strength is a headwind for EM assets

Based on our models, the USD is within its fair value range

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-16

Apr-

16

Jun-1

6

Aug-1

6

Oct-

16

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6

Feb

-17

Apr-

17

Jun-1

7

Aug-1

7

Oct-

17

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c-1

7

Feb

-18

Apr-

18

Jun-1

8

Aug-1

8

(%)

US Euro Area China

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150

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9

Okt 00

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13

Feb

14

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z 1

4

Okt 15

Aug 1

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Jun 1

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Apr

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Broad USD +1 s.d. -1 s.d.

4


EMD Flows Have Slowed, But Remain Positive YTD Institutions Remain Committed to EMD

As of 30 June 2018

The allocations and specific securities are based upon the client’s account. For illustrative purposes only, this should not be considered a recommendation or solicitation to

purchase or sell any security. Allocations and security selection are subject to change.

2018 Flows Positive, Driven by Institutions

-15

-5

5

15

25

35

45

Q42016

Q12017

Q22017

Q32017

Q42017

Q12018

Q22018

Strategic Retail

Cumulative Institutional Flows Have Been Steady($B)

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Jun 1

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($B)

Institutions have accounted for nearly all of YTD flows

ETFs, which account for around 5% of the investor base, have had subdued flows

EMD holdings by global bond funds are roughly 11%, almost 3% below the 2013 peak

5


Deterioration Mainly in Latin AmericaFundamentals Generally Solid


Source: Lazard, Haver Analytics

-2%

0%

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Okt-

2010

Mrz

-201

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Aug-2

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2018

Latam EMEA EM Asia ex-China

0%

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Apr

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Asia Europe Latin America

0

1.000.000

2.000.000

3.000.000

4.000.000

5.000.000

6.000.000

7.000.000

8.000.000

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Jun 1

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Sep 1

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Jun 1

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FX Reserves Public External Debt EM Total External Debt

EM ex-China: External Debt and International Reserves (US$ M)

EM GDP Growth (YoY) EM Inflation (YoY)

6


Recent Price Action Unjustified In Some CasesFundamentals Are Varied



-10,0 0,0 10,0 20,0 30,0

TurkeyArgentina

MexicoRomaniaS. Africa

IndiaIndonesiaColombia

PolandPeruChile

PhilippinesCzech

MalaysiaBrazil

RussiaHungary

KoreaIsrael

ThailandTaiwan

Singapore

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

Arg

entina

Turk

ey

Ro

man

ia

Bra

zil

S. A

fric

a

Co

lom

bia

India

Peru

Indon

esia

Me

xic

o

Ch

ile

Hu

nga

ry

Phili

ppin

es

Ch

ina

Uru

guay

Pola

nd

Czech

Isra

el

Ma

laysia

Ru

ssia

Kore

a

Tha

iland

Taiw

an

Sin

gapo

re

Fiscal CA Twin Balances

EM external fundamentals suggest a limited group of countries exposed to tightening global liquidity

Many EM assets are pricing in more stress than fundamentals warrant

EM Current Account and Fiscal Balances (% of GDP) EM Basic Balance (% of GDP, Q1 2018)

7



Areas of Concern: Argentina, Turkey and South Africa External Debt Stress is Limited

2018 Projections Argentina Turkey South Africa Romania Colombia Indonesia Brazil Mexico India

Nominal GDP (USD Billions) 425.1 705.0 338.1 237.3 330.9 1,066.8 1,949.0 1,206.0 2,848.2

Real GDP (%) -2.4 4.2 1.4 4.3 2.6 5.2 1.4 2.3 7.4

Year-End CPI (%) 40.3 18.0 4.7 4.6 3.3 3.5 4.2 4.6 5.2

Fiscal Balance (% of GDP) -5.0 -2.8 -3.7 -3.4 -3.1 -2.4 -7.5 -2.2 -6.5

Interest (% of Revenues) 6.9 5.3 13.6 4.7 16.9 8.5 30.1 14.0 22.8

FC Debt/Public Debt (%) 75.7 37.5 9.0 47.2 34.1 52.3 4.9 32.5 10.9

FC Public Debt (% of GDP) 48.8 10.7 5.1 16.8 17.7 16.2 3.8 14.8 7.5

Government Debt (% of GDP) 64.5 28.5 56.2 35.5 52.0 31.0 78.2 45.4 68.9

Current Account (% of GDP) -4.0 -6.2 -3.5 -4.0 -2.9 -2.4 -0.9 -1.6 -1.2

External Debt (% of GDP) 67.2 65.7 56.0 48.8 42.1 33.7 32.0 37.4 23.2

Debt Service (% of Exports of Goods and Services) 109.9 33.9 7.3 30.5 34.4 24.6 43.8 9.0 29.5

Foreign Reserves/Short-Term External Debt (%) 134.3 91.5 173.2 120.0 267.4 299.0 755.1 275.5 44.2

Foreign Reserves (mos. of imports) 9.0 5.2 5.7 4.3 9.5 7.2 18.3 4.7 7.3

Potential REER/ToT Downside* -7.0% 0.0% -8.3% -14.1% -2.9% -49.3% -35.8% -9.1% -58.0%

FX Level (implied) 41.78 6.67 16.68 4.60 3,181 24,457 5.95 21.28 127.85

Potential REER Downside* -21.6% 0.0% -11.9% -19.4% -10.6% -37.5% -33.4% -9.6% -23.3%

FX Level (implied) 48.36 6.67 17.30 4.86 3,436 21,725 5.81 21.37 90.32

FC Public Debt w/ REER/ToT Balance Sheet Effect (% GDP) 52.2 10.7 5.5 19.1 18.2 24.2 5.2 16.1 11.9

FC Public Debt w/ REER Balance Sheet Effect (% GDP) 59.4 10.7 5.7 20.0 19.6 22.3 5.1 16.2 9.3

External Debt w/ REER/ToT Balance Sheet Effect (% GDP) 71.9 65.7 60.6 55.7 43.3 50.4 43.4 40.8 36.7

External Debt w/ REER Balance Sheet Effect (% GDP) 81.7 65.7 62.7 58.3 46.6 46.4 42.7 40.9 28.6

*Note: Based on distance to weakest monthly level since Dec-2000

SCENARIO ANALYSIS

8


Source: Lazard, Haver Analytics, JPM

EM REER Adjusted for Commodity PricesValuations Are Far From Stretched

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GBI REER/ToT GBI REER/ToT; 5-year Average US REER

EM FX (JPM GBI-EM Global Diversified) Valuation (2010 = 100)

9%

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Source: Bloomberg, Lazard

External EMD Has Consistently Earned Positive ReturnsReturn Profiles Vary Significantly Through Cycles

Hard Currency

External EMD has a more steady return profile due to the typical low correlation between Treasury rates and spreads

The investment horizon for Local EMD tends to be more cyclical and sensitive to entry points

-10%

-5%

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20%

3-Yr Rolling Return 5-Year Rolling Return

-10%

-5%

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20%

3-Yr Rolling Return 5-Yr Rolling Return

Local Currency

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Breakeven Yield Change is the increase in yields that would eliminate the carry earned in one year

Hedge cost represents the estimated annualized cost of a 3M EUR/USD hedge. Indices used: EMD Sovereign – JPM EMBI GD; EMD Corp – JPM CEMBI BD.

Source: Lazard, JP Morgan, Bloomberg, Barclays

High YTM vs Fixed Income and Similar Quality Alternatives

EMD “Net” Yield Attractive for European Investors

EMD YTM Net of Hedging Costs vs 10-Year Bund YTM

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(%)

50% EMD Sovereign / 50% EMD Corp Net Yield 10Y Bund Yield

Yield Hedge Cost “Net” YieldBreakeven Yield

Change

External EMD (50% Sovereign/50% Corporate) 6.36% (2.80%) 3.56% +0.63%

10-Year German Bund 0.33% - 0.33% +0.03%

11


Blended External Debt

Top Level

Characteristics

Primary Index 50% JPM EMBI Global Div. / 50% JPM CEMBI Broad Div.

Index Market Cap (bn)1 $1,823

Currency Denomination USD

# of Countries 82

# of Issuers 794

Duration (yrs) 5.65

YTM 6.36%

Spread (bps) 352

Average Rating BBB-

Sector Allocation Sovereign 39%

Quasi-sovereign 11%

Corporate 50%

Quality Allocation Investment Grade 56%

High Yield 44%

Portfolio CharacteristicsExternal EMD is a Large, Diverse Asset Class

As of 31 August 20181 Market cap reflects the EMBI Global and CEMBI Broad .

The return and risk characteristics presented represent the period from 31 December 2002 – present. This is not intended to represent the performance of any product or

strategy managed by Lazard. The indices listed above are unmanaged and have no fees. It is not possible to invest directly in an index. Past performance is not a reliable

indicator of future results.

Source: Lazard, JPMorgan.

Historical default rates have been very low over the past decade

- EM Sovereign: 0.5% average and range of 0-2%

- High Yield EM Corporate: 2% average and range of 0-5%

12


The Way Forward Prolonged Period of Broad EMD Stress Unlikely

As of 31 August 2018.

The allocations and specific securities are based upon the client’s account. For illustrative purposes only, this should not be considered a recommendation or solicitation to

purchase or sell any security. Allocations and security selection are subject to change.

Confluence of Factors Contributed to Decline in Sentiment and Weakness in EM

Divergent growth between US and other developed markets leading to dollar strength

Tighter financial conditions and withdrawal of liquidity from the global financial system

Fear of prolonged trade war dampening global growth

Idiosyncratic factors in vulnerable countries

Factors That Should Support an EM Recovery

Stabilization of USD

Rebound in DM leading indicators outside the US

Softening of trade policy

Favorable idiosyncratic developments

- Argentina: New policy makers to restore credibility, reduction in political risk

- Brazil: Centrist or center-right candidate victory in October presidential election

- Turkey: Improved relations with US, credible monetary policy, comprehensive plan for external financing and

banking sector support

Outlook and Positioning

Prolonged period of broad-based stress unlikely. Risk of contagion mainly through sentiment.

Volatility may persist in near-term, but medium-term outlook is constructive

Favor hard currency (sovereigns and corporates). Focus on countries with solid fundamentals, favorable

reform trajectories and attractive valuations

13


Disclaimer

This document is provided by Lazard Asset Management LLC or its affiliates (“Lazard”) for informational purposes only. Nothing herein constitutes investment advice or a recommendation relating to any security, commodity, derivative, investment management service or investment product. Investments in securities, derivatives and commodities involve risk, will fluctuate in price, and may result in losses. Certain assets held in Lazard’s investment portfolios, in particular alternative investment portfolios, can involve high degrees of risk and volatility when compared to other assets. Similarly, certain assets held in Lazard’s investment portfolios may trade in less liquid or efficient markets, which can affect investment performance. Past performance does not guarantee future results.

This document is intended only for persons residing in jurisdictions where its distribution or availability is consistent with local laws and Lazard’s local regulatory authorizations. The Lazard entities that have issued this document are listed below, along with important limitations on their authorized activities.

Australia: Issued by Lazard Asset Management Pacific Co., ABN 13 064 523 619, AFS License 238432 ,Level 39 Gateway, 1 Macquarie Place, Sydney NSW 2000, which is licensed by the Australian Securities and Investments Commission to carry on a financial services business. This document is intended for wholesale investors only. Canada: Issued by Lazard Asset Management (Canada) Inc., 30 Rockefeller Plaza, New York, NY 10112 and 130 King Street West, Suite 1800, Toronto, Ontario M5X 1E3, a registered portfolio manager providing services to non-individual permitted clients. Dubai: Issued and approved by Lazard Gulf Limited, Gate Village 1, Level 2, Dubai International Financial Centre, PO Box 506644, Dubai, United Arab Emirates. Registered in Dubai. International Financial Centre 0467. Authorised and regulated by the Dubai Financial Services Authority to deal with Professional Clients only. EU Member States: Issued by Lazard Asset Management (Deutschland) GmbH, Neue MainzerStrasse 75, D-60311 Frankfurt am Main. Hong Kong: Issued by Lazard Asset Management (Hong Kong) Limited (AQZ743), One Harbour View Street, Central, Hong Kong. Lazard Asset Management (Hong Kong) Limited is a corporation licensed by the Hong Kong Securities and Futures Commission to conduct Type 1 (dealing in securities) and Type 4 (advising on securities) regulated activities only on behalf of “professional investors” as defined under the Hong Kong Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong) and its subsidiary legislation. Korea: Issued by Lazard Korea Asset Management Co. Ltd., 10F Seoul Finance Center, 136 Sejong-daero, Jung-gu, Seoul, 100-768. Peoples Republic of China: Issued by Lazard Asset Management. Lazard Asset Management does not carry out business in the P.R.C and is not a licensed investment adviser with the China Securities Regulatory Commission or the China Banking Regulatory Commission. This document is for reference only and for intended recipients only. The information in this document does not constitute any specific investment advice on China capital markets or an offer of securities or investment, tax, legal or other advice or recommendation or, an offer to sell or an invitation to apply for any product or service of Lazard Asset Management. Singapore: Issued by Lazard Asset Management (Singapore) Pte. Ltd., 1 Raffles Place, #15-02 One Raffles Place Tower 1, Singapore 048616. Company Registration Number 201135005W, which provides services only to “institutional investors” or “accredited investors” as defined under the Securities and Futures Act, Chapter 289 of Singapore. Switzerland: Issued by Lazard Asset Management Schweiz AG, Usteristrasse 9, CH-8001 Zurich. United Kingdom: Issued or approved by Lazard Asset Management Ltd., 50 Stratton Street, London W1J 8LL. Registered in England Number 525667. Authorised and regulated by the Financial Conduct Authority (FCA), providing services only to persons classified as eligible counterparties or professional clients under the rules of the FCA. United States: Issued by Lazard Asset Management LLC, 30 Rockefeller Plaza, New York, NY 10112.

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