Asian bond market and currencies trends: the investment opportunity in Schroder ISF Asian Bond. How Phuang Goh Head of Asian (ex Japan) Fixed Income

Transcription

1 Asian bond market and currencies trends: the investment opportunity in Schroder ISF Asian Bond How Phuang Goh Head of Asian (ex Japan) Fixed Income

2 Agenda Page no Overview of Asian Bond Markets 2 Schroder s Experience in Asian Bonds 7 Market Outlook and Strategy 10 Appendix 29 1

3 Overview of Asian Bond Markets

4 Overview of Asian Bond Markets Explosive growth in Asian bond markets. Largest bloc within EM debt universe. Overview Emerging Market debt outstanding 1 USD bn % p.a % p.a Asian debt outstanding 2 USD bn % p.a % p.a Local Currency Bonds External Local Currency Bonds External Global EM debt composition 1 (end-2006) Asian debt composition 1 (end-2006) 16% 25% 7% 1% LATAM Asia EMEA 57% 35% External Corp External Govt Local Corp Local Govt 59% 3 1. Source: Merrill Lynch, BIS, Schroders 2. Source: BIS, AsianBondsOnline, JPMorgan, Schroders

5 Overview of Asian Bond Markets Within EM, Asia s strong relative fundamentals stand out Overview Economic Growth (2008F) Inflation (2008F) 10.0% 8.0% 6.0% Real GDP Growth (%yoy) 5.60% 7.80% Emerging Markets Average: 6.4% 8.0% 6.0% % change, Dec over Dec 5.60% 7.10% 4.90% Emerging Markets Average: 5.6% 4.0% 4.10% 4.0% 2.0% 2.0% 0.0% LATAM EMEA Emerging Asia Current Account (2008F) 6.0% % of GDP 4.0% 4.60% 0.0% LATAM EMEA Emerging Asia FX Reserves (2008F) Central bank gross non-gold FX reserves (US$bn) % 0.0% -2.0% -4.0% LATAM EMEA Emerging Asia -0.30% -2.30% Emerging Markets Average: 1.7% LATAM EMEA Emerging Asia 4 Source: Reuters, Bloomberg, National Statistical Offices and Credit Suisse forecasts, December 2007

6 Overview Overview of Asian Bond Markets Attractive long-term risk-adjusted returns. Low correlation with traditional asset classes Risk/return analysis of various asset classes 1 (in USD except Lehman Euro Aggregate) Asset Class 1 5 Yr volatility % p.a. 5 Yr Return % p.a. Return per unit of Risk. US Treasuries 4.4% 4.7% 1.08 Asian Local Bonds 4.4% 8.4% 1.94 Asian USD Bonds 4.4% 6.7% 1.52 Global Govt Bonds 6.7% 7.3% 1.08 Emerging Market Debt 6.7% 12.5% 1.87 European Bonds (EUR) 2.9% 3.8% 1.31 Global Equities 10.3% 14.9% 1.45 European Equities 12.9% 18.5% 1.43 Emerging Market Equities 18.4% 30.3% 1.65 Correlation of Asian Bonds with traditional asset classes (in USD) 2 Asset Class 1 Asian USD Bonds 1. Asset classes represented by the following indices: US Treasuries Citi Treasury/Agency Index Asian Local Bonds HSBC Asian Local Bond Index Asian USD Bonds Merrill Lynch Asian Dollar Bond Index Global Government Bonds Citigroup World Government Bond Index Emerging Market Debt JPMorgan Emerging Market Debt Index European Bonds Lehman Euro Aggregate Global Equities MSCI World Index European Equities MSCI Europe Index Emerging Market Equities MSCI Emerging Market Index Asian Local Bonds Global Equities European Equities Global Government Bonds Emerging Market Bonds European Bonds Source: Bloomberg, Schroders as at 31/01/2008, in USD except European Bonds which is in EUR 2. Source: Schroders, as at 30/11/2007, in USD

7 Overview of Asian Bond Markets Positive Market Developments : Making Asian bonds more attractive to investors Overview Withholding Taxes Eliminated in Malaysia, Thailand; Reduced in Korea; Philippines next? Asian Central Banks Initiatives After ABF1 and ABF2 (indexed vehicles), increasing signs of central bank active participation via direct and outsourced investments Currency Regimes Pegs dismantled in China/ Malaysia Greater currency flexibility and much higher FX market liquidity Local Yield Curves Extended in Singapore, Korea, Malaysia (20yrs), Hong Kong (15yrs), Indonesia (30yrs) Inclusion in Global Bond Indices E.g. WGBI => Singapore, Malaysia 6

8 Schroder s Experience in Asian Bonds

9 Schroders Experience in Asian Bonds A pioneer investor in Asian bonds since 1998 Schroders Experience Three Levers of Value-Add Strong long-term risk adjusted returns Annualised Returns Risk Return Chart (5 Yrs to 31 January 2008 in USD terms) 1. Interest Rate Management 16.0% 14.0% 12.0% Global Emerging Market Bonds 2. Currency Management Schroder Asian Bonds 3. Credit Risk Management 10.0% 8.0% 6.0% 4.0% Asian Local Bonds Asian USD Bonds Schroder ISF Asian Bond US Treasury / Agency Bonds Global Government Bonds 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% Annualised Volatility Note: US Treasury/Agency Bonds - Citigroup US Treasury/Agency Index Global Bonds - Citigroup World Government Bond Index Global Emerging Market Bonds - JPMorgan Emerging Market Bond Index Asian USD Bonds JPMorgan Asia Credit index (From 29 Mar 02 to 31 Jul 06), New JPMorgan Asia Credit Index (From 1 Aug 06 onwards); Asian Local Bonds HSBC Asian Local Bond Index Schroder ISF Asian Bond I Class Shares, USD, Bid-to-Bid, with dividends reinvested, Net Returns Source: Schroders, Bloomberg 8 The above is for illustrative purposes only. It does not constitute a recommendation to invest in the Fund. Past performance is not indicative of future returns.

10 Schroders Experience in Asian Bonds Awards and Recognitions Schroders Experience Consultant Ratings Product Schroder Asian Bond Fund (Singapore) Schroder Asian Premium Bond Fund (Singapore) Awards Product Type Core Asian Bonds Asian Investment Grade Bonds Consultant Rating 1 Mercer Consulting Mercer Consulting Awarded by: Category Period Position Asia Asset Management Awards 2007 Asian Bond House of the Year n/a 1st Edge Lipper Singapore Fund Awards 2006 Bond Asia Pacific 3 years 1st Edge Lipper Singapore Fund Awards 2006 Bond Asia Pacific 5 years 1st Edge Lipper Awards Hong Kong 2006 Bond Asia Pacific 5 years 1st Asian Investor Magazine 2006 Achievement Awards Asian Fixed Income risk adjusted returns 3 years 1st 1. As at January Research views may be downloaded from MercerFundWatch.com 9

11 Market Outlook and Strategy

12 US Economy Market Outlook and Strategy Prolonged housing slump, weakening job market and tightening credit conditions => Risks of a protracted US economic slowdown Federal Reserve Senior Loan Officer Survey*: Banks tightening standards for mortgages to individuals (%) Tightest lending standards on record US Unemployment Rate expected to rise as job growth fades U.S. UNEMPLOYMENT RATE EXPECTED TO RISE AS JOB GROWTH FADES "X" represents forecast unemployment rate at mid and end of U N E M P L O Y M E N T U N E M P L O Y M E N T 0 R A T E % X X R A T E % Source: Federal Reserve Board, Merrill Lynch 2. Source: MFR, Inc, January

13 USD Outlook The USD adjustment is NOT over, whether structurally or cyclically Market Outlook and Strategy US dollar and US current account balance US dollar and Federal Funds Rate % of GDP Index Level Index Level % Dec-99 Aug-01 Mar-03 Sep-04 Apr-06 Oct Current Account Balance (LHS) US dollar (RHS) DXY Index (LHS) Fed Funds Rate (RHS) Source: Bloomberg, Schroders 12

14 USD Outlook Other USD worries : Impact of credit turmoil on capital inflows, SWF/EM diversification 1. Credit market turmoil 1 Credit has been the asset of choice in the US for the private sector USDbn USD bn Currency composition 2. SWF diversification 2 3. Private sector diversification 2 SWF allocations Foreign assets as a share of total assets 70% % 25 Market Outlook and Strategy 60% 50% 20 US Mutual Funds 40% 15 30% 10 20% 10% 5 0% Norway Pension Fund Russia Stabilisation Fund Qatar Investment Authority "All" Central Banks USD EUR GBP JPY Other Source: HSBC, Thomson Financial Datastream 2. Source: UBS

15 Market Outlook and Strategy Asian Currency Outlook Euro has shouldered bulk of USD adjustment, BUT burden could fall on Asian FX more EUR currency has strengthened a lot more 1 2Y German Bunds EUR Asian Currencies % p.a % p.a Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-03 Feb-04 Apr-05 Jun-06 Aug-07 Banks tightening business lending standards (%) 2 Asia 10 a major contributor to world growth Source: Bloomberg, Schroders 2. Source: ECB and Federal Reserve Board; Net balance for the period 1998 Oct Source: DBS

16 Asian Currency Outlook Asian currency regimes are changing to accepting more strength Market Outlook and Strategy Appreciation of Asian Currencies vs USD Calendar year currency appreciation vs USD Indexed to 100 as at 31/12/ Chinese Yuan +7.0% +3.3% Indian Rupee +12.3% +1.8% Malaysian Ringgit +6.8% +7.0% Philippine Peso +18.8% +8.3% Vietnamese Dong +0.2% -0.9% CNY INR MYR PHP Source: Bloomberg, Schroders, to 31/01/

17 Asian Currency Outlook Why is Asia tolerating currency strength now? (1) Plunging USD short rates; (2) Asian policy response to inflation; (3) Strong balance-of-payments Asian vs US short rates 1 Rising inflation in Asia % Market Outlook and Strategy 8.0% 6.0% 4.0% 3M US T-Bill: 1.94% 2.0% 0.0% RMB 7D Interbank HKD 3M HIBOR INR 91D T Bill KRW 3M KORIBOR MYR 3M KLBOR PHP 3M PHIBOR SGD 3M SIBOR TWD 90D CP Asian FX Reserves approaching US$4 trillion 3 US$bn 4000 Philippines inflation has fallen due to PHP strength Asian FX Reserves China F 2008F 2009F Source: Bloomberg, Schroders, as at 31/01/ Source: CEIC, Deutsche Bank 3. Source: CEIC, Datastream, UBS estimates ( ) as at 5 December 2007

18 Market Outlook and Strategy Asian Currency Outlook Impact of US slowdown on Asia : Slowing export growth already evident, buffered by intra-asian and EU demand Sequential export momentum fading 1 Divergence between exports by destination 1 Direction of exports, Direction of exports, % share of merchandise exports % share of merchandise exports 18% 22% 19% 25% 11% 13% 21% NJ Asia ex China US EU China Japan Rest of World 8% 19% 15% NJ Asia ex China US EU China Japan Rest of World 15% 14% Source: CEIC, Goldman Sachs Economics Research; * Other emerging markets: BRIC, ASEAN (incl. Vietnam), Middle East, excl. China 2. Source: CEIC, Credit Suisse; Asia ex China comprises Hong Kong, India, Indonesia, Malaysia, Korea, Philippines, Singapore, Taiwan, Thailand

19 Asian Currency Outlook Asian Resilience : Don t forget domestic demand, asset cycles, policy flexibility Market Outlook and Strategy Asian property prices have lagged 1 Contributions to GDP growth 2 (%) 7.0% 6.0% 5.0% 4.0% 3.0% Net Exports Total Investment Total Consumption 2.0% 1.0% 0.0% F 2008F Asian real interest rates 1 Public debt in 2007, latest data 3 OECD India Philippines Malaysia Thailand Indonesia Korea Taiwan China Hong Kong Source: CEIC, Merrill Lynch calculations 2. Source: Citi calculations, CEIC; Asia includes Hong Kong, India, Indonesia, Malaysia, Korea, Philippines, Singapore, Taiwan, Thailand 3. Source: Lehman Brothers, IMF, World Bank, OECD, CEIC

20 Currency Strategy Our preferred Asian Currencies Market Outlook and Strategy Key Economic Forecasts for 2008 Investment Theme USD should continue to broadly weaken due to protracted, slow growth and aggressive rate cuts ahead Country Real GDP % yoy Inflation % China Hong Kong CA Bal % of GDP Remarks Asian currencies with strong domestic demand/balance of payments support and an official policy of acceptance of currency strength should perform better India Indonesia Korea (South) Structural economic growth intact Strategy Favour SGD, MYR, INR, PHP and TWD relative to others Malaysia Philippines Singapore Policy favours currency strength Policy favours currency strength Policy favours currency strength Taiwan Major positive change in political landscape + capital flight reversed Thailand Source: Deutsche Bank AG, 3 January 2008; Schroders 19

21 US Bonds Outlook Market Outlook and Strategy Downside risks to risky assets, potentially zero/negative real FED funds rates to underpin US bond markets S&P US Real Interest Rates 2 % Spread between Core CPI and Federal Funds Target Rate Jan-01 Mar-02 Apr-03 Jun-04 Aug-05 Oct-06 Nov Dec- 87 Dec- 89 Dec- 91 Dec- 93 Dec- 95 Dec- 97 Dec- 99 Dec- 01 Dec- 03 Dec- 05 Dec- 07 Source: Bloomberg, to 08/02/2008 Source: Bloomberg, to 31/12/

22 Market Outlook and Strategy Asian Local Bonds Outlook Asian local bonds underperformed in 2007, but likely to perform better in 2008 on aggressive FED cuts, strong currencies and increasingly dovish central banks change in 10Yr Govt Bond Yields All markets have underperformed US Treasuries Bps January 2008 change in 10Yr Govt Bond Yields Most Asian local bond markets starting to outperform Bps KRW TWD MYR PHP INR IDR SGD THB UST KRW TWD MYR PHP INR IDR SGD THB UST Source: Bloomberg, Schroders 21

23 Asian Local Bonds in Focus : Korea Bank of Korea turned neutral/dovish on concerns over slowing global growth Market Outlook and Strategy KRW 10Yr Govt Bond Yields 1 % BoK turned neutral/dovish Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Rate changes and the leading composite index 3 Korea s leading composite index 2 Rate changes and core CPI index (2000=100) Source: Bloomberg, to 18/01/ Source: National Statistical Office, Lehman Brothers 3. Source: Lehman Brothers, CEIC

24 Asian Local Bonds in Focus : Malaysia Market Outlook and Strategy Strong MYR and slower external demand should flow through to this laggard market 10Yr Govt Bond Yield: SGD vs MYR Indexed to 100 as at 30/06/ SGD 10Y MYR 10Y 70 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Strong policy focus on promoting domestic demand 2 Percentage points Contribution to GDP growth Strong MYR and possibility of lower MYR short rates 1 % % Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Federal Funds Target Rate (LHS) MYR 3M Interbank Rate (RHS) USDMYR (RHS) Source: Bloomberg, Schroders, to 29/01/ Source: CEIC and Lehman Brothers

25 Asian Local Bonds in Focus: Singapore Market Outlook and Strategy Strong SGD, high correlation of SGD short rates with FED policy, bullish technicals 10Yr SGD Govt Bond Yield 1 SGD short rates correlate well with Fed policy Oct-01 Nov-02 Jan-04 Mar-05 May-06 Jul-07 % % Federal Funds Target Rate (LHS) SGD 3M SIBOR Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Strong SGD supportive 1 MAS increasing pace of SGD NEER appreciation Source: Bloomberg, Schroders, to 29/01/ Source: CEIC, Barclays Capital

26 Duration Strategy Long duration bias but tactically cautious Market Outlook and Strategy US 10-year Treasury Yield % Investment Theme Slower-for-longer US economic growth with increasing risks of spilling over to restof-world Strategy Medium term long (High Quality) duration bias. Tactically cautious given sharp bond market rally in Jan 08. Awaiting better levels to re-establish longs Jan-00 Feb-01 Apr-02 Jun-03 Aug-04 Sep-05 Nov-06 Jan-08 Source: Bloomberg, to 08/02/

27 Asian Credit Market Outlook Healthy fundamentals, BUT a hostage to global re-pricing of credit risk premium. Technical conditions (market liquidity, pricing/appetite for new issuance) need to improve before confidence returns. Asian Bank exposure to structured products UOB DBS OCBC Woori Bank % of assets (LHS) % of T1/ equities Fubon FHC* Cathay FHC* Asia HG Corp US HG E Sun FHC* Krung Thai Bank Bank Thai* Bank of Ayudhya Bangkok bank BEA DSB WHB CKWB Projected Regional Leverage for 2007E 2 Recent: Asian HG vs US HG Credits (bps) 3 Historical: US HY credit spreads (bps) US Europe UK Japan Asia ex Japan Market Outlook and Strategy Interest Cover (x) Net Debt/Equity (%) LATAM BB B CCC World Jan-07 Feb-07 Mar-07 May-07 Jun-07 Aug-07 Sep-07 Nov-07 Dec Jan-97 M ay-99 Sep-01 Jan-04 Jun Source: Company data, UBS. * denotes % of equity 2. Source: CEIC, UBS estimates 3. Source: Bloomberg, Credit Suisse, to 02/01/ Source: Bloomberg, Merrill Lynch, to 16/11/2007

28 Credit Strategy Monitor for signs of market stability before committing fresh capital Market Outlook and Strategy JPMorgan Emerging Markets Bond Index Plus EMBI+ Investment Theme Both technical (chart signals, new issuance, market illiquidity) and fundamentals (US recession risk, rising corporate defaults) to pressure spreads wider Strategy Avoid commitment of fresh capital to credit investments. Monitor new issuance appetite and performance for signs of market stability and opportunities Index Value Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Nov-06 May-07 Nov-07 Source: Bloomberg, to 08/02/

29 Investment Strategy Summary Current Portfolio Positioning Schroder ISF Asian Bond (USD) Market Outlook and Strategy Portfolio Characteristics Short duration after taking profits on longduration strategy Monitoring for re-entry levels. SISF Asian Bond Average YTM 4.51% Average Credit Rating A- Average Duration 3.29 yrs Currency Exposure* Short USD bias, mainly against Asian currencies. USD, 25.2% Sector Allocation Local Currency Sovereign bonds for currency exposure and some duration Some Bunds for Euro exposure Maintain low exposures in HY credit 0.7% 15.5% 7.1% 5.7% 19.3% Country Allocation Well-diversified exposure % of Fund Asia, 52.2% * Includes FX hedges, if any Source: Schroders, as at 01/02/2008 EUR, 22.6% 51.7% External Sovereigns External Corporates Local Currency Sovereign/NDF Local Currency Corporates Bunds Cash Malaysia Germany Philippines Indonesia Korea Singapore China India Hong Kong Khazakhstan Other Cash

30 Appendix

31 Schroders Asian Fixed Income Team Stable, experienced team well integrated with Schroders global/regional resources Appendix Goh How Phuang Head of Asian Fixed Income (18 yrs / 13 yrs) Angus Hui Portfolio Manager (10 yrs / 7 yrs) Ang Chow Yang Portfolio Manager (7 yrs / 6.5 yrs) Richard Brown 1 Head of Credit Research (23 yrs / 7 yrs) Willy Lee 2 Fixed Income Dealer (13 yrs / 13 yrs) Dianna Enlund 3 Product Manager (9 yrs / 4.5 yrs) Corin Su Fund Manager s Assistant (14 yrs / <1 yr) Yeo Li Ping Credit Analyst (11 yrs / 1 yr) Kell Ow 2 Fixed Income Dealer (4 yrs / 2 yrs) Notes: () show total years experience / years spent at Schroders Dotted line represents indirect reporting line with direct reports as follows: 1. Reports to Global Head of Credit Research 2. Reports to Head of Asia ex Japan Dealing 3. Reports to Head of Product, Asia Source: Schroders, as at 31 December 2007 Kevin Foo Credit Analyst (3 yrs / 2 yrs) 30

32 Performance and Attribution Solid long-term track record in Asian Bond investing Appendix Performance as at 31-Dec-07 in USD Schroder ISF Asian Bond I Accumulation Share Class Return 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 9.44% 9.02% 8.80% 6.44% 6.68% 6.22% 5.37% 4.94% 4.16% Performance Attribution (in USD) Schroder ISF Asian Bond I Class Shares Coupon Capital Gains Currency Total % -2.16% 5.37% 9.02% % -0.95% 3.18% 8.15% % -1.23% -1.84% 2.29% % 4.67% 2.59% 12.35% % 6.52% 4.31% 15.85% 0.0% 1 Year 3 Years (p.a.) 5 Years (p.a.) Schroder ISF Asian Bond JACI Citi Treasury Agency Index Source: Schroders, Bloomberg, SISF ABF - I Class Shares, USD, Bid-to-Bid, with dividends reinvested, Net Returns, Incepted 05/11/ The above is for illustrative purposes only. It does not constitute a recommendation to invest in the Fund. Past performance is not indicative of future returns.

33 Schroder ISF Asian Bond Key characteristics Appendix Date of launch: 16/10/1998 Fund manager: How Phuang Goh (Singapore) Total Fund size: EUR 1,3 bn as at end of December 2007 Available share classes: USD and EUR hedged share classes* ISIN Codes: C shares in USD: LU C shares EUR hedged*: LU Tickers Bloomberg: C shares in USD: SCHABCA LX C shares in EUR Hedged: TBC Management fees: 0, 75% * The share class in Euros will be hedged against EUR/ USD currency moves and was been launched on 9 November

34 Important information For professional advisers only. This material is not suitable for private customers. This document does not constitute an offer to sell or any solicitation of any offer to buy securities or any other instrument described in this document. Reliance should not be placed on the views and information in the document when taking individual investment and / or strategic decisions. The information and opinions contained in this document have been obtained from sources we consider to be reliable. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system.subscriptions for shares of the Company can only be made on the basis of its latest prospectus together with the latest audited annual report (and subsequent unaudited semi-annual report, if published), copies of which can be obtained, free of charge, from Schroder Investment Management (Luxembourg) S.A. 5, rue Höhenhof, L-1736 Senningerberg, Luxembourg. The Company is a Luxembourg-registered UCITS recognised in the UK under Section 264 of the Financial Services and Markets Act There will be no right to cancel any agreements to purchase shares under section 6.7 of the UK Financial Services Conduct of Business Sourcebook. All or most of the protection provided by the UK regulatory system does not apply to investments in the Company and compensation will not be available under the UK Financial Services Compensation Scheme. In accordance with the current prospectus, other than for the Schroder ISF Global Property Securities fund, the Company will seek UK distributor status for all distribution A and C shares.an investment in the Company entails risks, which are fully described in the prospectus. Past performance is not a guide to future performance and may not be repeated. Investors may not get back the full amount invested, as prices of shares and the income from them may fall as well as rise. Exchange rate changes may cause the value of any overseas investments to rise or fall. Schroders has expressed its own views and opinions in this document and these may change.issued in August 2007 by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA. Authorised and regulated by the Financial Services Authority