INDEX BENCHMARKS FOR EMERGING MARKETS DEBT

INDEX BENCHMARKS FOR EMERGING MARKETS DEBT Emerging markets debt has, over the past decade, attracted growing attention from investors as a higher-yielding alternative. Investors had initially insisted on hard currency emerging markets bonds but, increasingly, they have added local currency bonds to their portfolios. The bond markets of the emerging markets have grown substantially over the past decade, and the investment universe has become broader. More and more countries, currencies, and issuers have been added, liquidity has increased substantially, investors diversification opportunities have been considerably expanded, and the quality of the issuers has improved. When establishing an emerging markets debt (EMD) mandate, many questions have to be answered. Passive or active management? Hard or local currencies? Government and corporate bonds? Is a blend concept, which invests across investment options, the right solution? Or perhaps a total return strategy independent of index benchmarks? How to deal with the diverse currency risk? J.P. Morgan emerging markets debt indices are the most widely followed among asset managers in the industry. Since most investors in emerging markets debt will have some exposure to these indices, it is important to understand how they are constructed as well as their potential benefits and drawbacks. Among the most common representatives of the various EMD markets are the J.P. Morgan EMBI Global Diversified Index for government bonds in hard currencies, the J.P. Morgan CEMBI Broad Diversified Index for corporate bonds in hard currencies, and the J.P. Morgan GBI-EM Global Diversified Index for government bonds in local currencies. 1 In historical terms, hard currency investments as listed in the J.P. Morgan EMBI Global Diversified Index received the greatest attention from investors. This is mainly because it had a large investable universe, the currency risk was relatively easy to manage for many investors, and the index is well diversified across 63 countries and 127 issuers. For some years the strongest market growth has been in the J.P. Morgan CEMBI Broad Diversified Index for hard currency corporate bonds and the J.P. Morgan GBI-EM Global Diversified Index for local currency government bonds. These markets are often viewed as the actual emerging markets bond markets for investors and active managers over the long term, because investors can potentially exploit illiquidity and inefficiency premiums. Currency management can play an important role for non-us investors. All emerging markets debt indices are listed in base form in US dollars, so investors must decide whether to hedge currency exposure.

2 The Global Bond Market Political discussion in recent years has focused on the topics of saving and austerity. In Europe but also in the United States, Japan, and many emerging markets the global financial crisis appears to have inspired some rethinking, and many politicians have increasingly taken the position that you can only spend what you ve brought in. Some commentators argue that not only the state, but the banks, some enterprises, and private consumption as well, must deleverage. Other critics have complained that the austerity of recent years endangers growth, jobs, and prosperity. From this debate, it is reasonable to assume that the world bond markets have not grown in some time as less and less debt is being created. 2 However, the opposite has actually occurred. Worldwide debt and the volume of the world bond markets have continued to rise since the financial market crisis, albeit at muted rates. The world remains a debt economy and the economic actors remain dependent upon new loans. The inventories of financial assets especially bonds have risen steadily and reached a new high at the end of 214 (Exhibit 1). 3 A large portion of the assets on the financial markets is either not relevant or not accessible to the typical investor. When limiting the bond market to those bonds that are publicly accessible and liquid enough to be listed in bond index benchmarks (e.g., indices of Bank of America Merrill Lynch), the assets under consideration shrink considerably, but are still huge and have grown explosively in the last decade. The largest portion of the overall volume of the $56. trillion (liquid) world bond market consists of (local) government bonds ($33.3 trillion), followed by corporate bonds ($7.9 trillion), and secured bonds (covered bonds or asset backed securities ($6.8 trillion)) (Exhibit 2). 4 Exhibit 1 Despite Talk of Austerity, Financial Assets Have Continued to Grow Since 28 (USD Trillion) 3 25 2 178 45 15 23 1 38 19 5 1 42 211 55 3 46 23 12 46 285 272 261 262 242 243 64 52 222 47 54 48 65 34 46 51 54 56 37 42 33 6 6 61 6 55 56 58 26 26 27 28 3 3 27 14 14 15 15 14 14 14 5 54 54 57 6 61 61 294 69 58 6 31 14 62 25 26 27 28 29 21 211 212 213 214E Nonsecuritized Loans Outstanding Securitized Loans Outstanding Nonfinancial Corporate Bonds Outstanding Financial Institutions Bonds Outstanding Public Debt Securities Outstanding Stock Market Capitalization As of 31 December 214 Source: BIS, Deutsche Bank, Haver, McKinsey Global Institute estimates

3 Emerging Markets Debt At the end of 214, the $6 trillion (liquid) emerging markets bond market made up slightly more than 1% of the global bond market, but has grown substantially more than the global bond market in recent years. This is true, in particular, of the non-sovereigns segment corporate bonds. On the positive side, the strong market growth means a larger universe and better diversification opportunities for investors than in the past, but it also implies that the debt of many emerging markets, coming from an extremely low basis, has steadily risen (Exhibit 3). Exhibit 2 The World Bond Market Has Grown Significantly in the Past Decade Face Value of Index-Qualifying Debt (USD Billion) 4 3 214 24 2 1 Local Government External/Quasi Government Securitized/ Collateralized High Grade Corporates High Yield Corporates As of 31 December 214 Source: BofA Merrill Lynch Indices Exhibit 3 The Growth of the Emerging Markets Bond Market Has Been Strong Outstanding Debt (USD face value in millions) YOY Growth Rate Local External External Non- Local Non- Total Local (%) External (%) External Non- (%) Local Non- (%) Total (%) 24 84,891 331,628 176,457 N/A 1,312,976 25 1,11,352 374,565 214,86 N/A 1,699,3 38. 12.9 21.3 N/A 29.4 26 1,338,553 383,271 277,837 N/A 1,999,66 2.6 2.3 29.8 N/A 17.7 27 1,64,257 41,87 344,152 N/A 2,349,496 19.9 4.6 23.9 N/A 17.5 28 1,719,223 386,239 348,855 N/A 2,454,317 7.2-3.7 1.4 N/A 4.5 29 2,35,395 435,42 423,569 N/A 2,894,366 18.4 12.7 21.4 N/A 17.9 21 2,421,852 488,516 565,513 N/A 3,475,881 19. 12.2 33.5 N/A 2.1 211 2,77,891 524,454 679,862 N/A 3,975,27 14.4 7.4 2.2 N/A 14.4 212 3,19,93 576,93 889,62 148,181 4,84,778 15.1 1. 3.9 N/A 2.9 213 3,579,6 61,594 1,11,836 161,313 5,453,342 12.2 5.8 23.9 8.9 13.5 214 3,921,58 63,969 1,253,949 25,37 5,984,796 9.6-1.1 13.8 27.3 9.7 As of 31 December 214 Source: BofA Merrill Lynch Bond Indices

4 For the investor (as well as the issuer) in emerging markets, the distinction between external debt and local debt is of central importance. External debt comprises the bonds of issuers of emerging markets that have been issued in hard currencies the US dollar, euro, British pound, or Japanese yen. About 75% of these bonds are listed in US dollars; for this reason, this is sometimes referred to as the dollar segment of emerging markets bonds. On the other hand, local debt consists of bonds that the issuer issues in its own currency. If, for example, Brazil finances a bond that is denominated in US dollars, this bond is external (sovereign) debt. If Brazil issues a bond in its own currency, the real, the bond is part of local (sovereign) debt. This logic applies not only to country issuers but companies as well. If Petrobras, domiciled in Brazil, issues a bond in US dollars, this bond is part of external (nonsovereign) debt. If it finances itself in Brazilian reals, the bond is part of local (non-sovereign) debt. External debt, or emerging markets hard currency bonds, was the dominant asset class for decades since the first debt was issued in the 196s. Due to their underdevelopment and weakness, most emerging countries were not able to issue bonds in their own currency, but instead had to issue bonds in currencies of the developed world. This has changed substantially in the last ten years. A great number of emerging markets now issue bonds that are denominated in local currencies. This local sovereign market has therefore been growing much more strongly than the traditional hard currency market for government bonds. At the end of 214, the market for government bonds in local currencies was, at $3.9 trillion, more than six times as large as the government bond market in hard currencies (based on Bank of America Merrill Lynch indices, Exhibit 3). The emerging markets corporate bond market is somewhat different. A growing market does exist for corporate bonds in local currencies, but it is highly fragmented, small in volume, and often not accessible to foreigners. Therefore, corporate bonds in hard currencies dominate the emerging markets corporate bond indices, while the corporate bond market in local currencies is under-represented in the indices. Overview of the Emerging Markets Debt Index Benchmarks Most index providers offer a series of emerging markets debt indices. It is generally true that not all emerging markets bonds are reflected in the conventional indices. The index providers concentrate on the most liquid primary countries and currencies in order to make the indices not too complicated and somewhat flexible. In addition, corporate bonds and inflation-indexed bonds are not included in the normal emerging markets debt indices. This means that passive ETF investments in emerging markets debt indices reflect only a small part of the actual investable universe. In particular, the areas of the markets where illiquidity and inefficiency premiums can be expected are not contained in index investments (Exhibit 4). J.P. Morgan offers a diverse range of emerging markets indices, which are used by most asset managers and emerging markets debt investors. J.P. Morgan distinguishes between three individual index groups. On the one hand, there is the J.P. Morgan GBI-EM index family, which encompasses six different indices and relates to the local currencies of emerging markets. This is distinguished from the J.P. Morgan EMBI family, which contains three emerging markets indices that relate to hard currencies. Finally, J.P. Morgan offers the J.P. Morgan CEMBI index family, which encompasses four indices that relate specifically to emerging markets corporate bonds (hard currency) and are not contained in the other emerging markets debt indices. The most important representatives of the three index families are the investable diversified indices, which are heavily used in asset management, i.e., the J.P. Morgan EMBI Global Diversified Index for government bonds in hard currencies; the J.P. Morgan CEMBI Broad Diversified Index for corporate bonds in hard currencies; and the J.P. Morgan GBI-EM Global Diversified Index for government bonds in local currencies (Exhibit 5). (We do not address the money market index J.P. Morgan ELMI+ in this publication.)

5 Exhibit 4 Passive Indices Often Don t Contain All Issuers of Emerging Markets Debt Colored Countries Represent Those in the JPM EMBI Global Diversified Index (63 Countries) for Hard Currency and JPM GBI-EM Global Diversified Index (16 Countries) for Local Markets Hard Currency Universe (7+ Countries) Local Market Universe (45+ Countries) Latin America Asia Eastern Europe Africa/M.E. Latin America Asia Eastern Europe Africa/M.E. Argentina China Albania Algeria Argentina China Belarus Angola Aruba Fiji Armenia Angola Brazil India Czech Republic Botswana Bahamas India Azerbaijan Bahrain Chile Indonesia Georgia Egypt Barbados Indonesia Belarus Cote d Ivoire Colombia Hong Kong Hungary Ghana Belize Hong Kong Bosnia Congo Costa Rica Malaysia Kazakhstan Israel Bolivia Malaysia Bulgaria Egypt Dominican Republic Mongolia Poland Kenya Brazil Mongolia Croatia Ethiopia Mexico Pakistan Romania Malawi Cayman Islands Pakistan Czech Republic Gabon Peru Philippines Russia Mauritius Chile Philippines Georgia Ghana Uruguay Singapore Serbia Namibia Colombia Seychelles Hungary Iraq South Korea Turkey Nigeria Costa Rica South Korea Kazakhstan Israel Sri Lanka Ukraine South Africa Dominican Republic Sri Lanka Latvia Jordan Thailand Tanzania Ecuador Thailand Lithuania Kuwait Vietnam Uganda El Salvador Vietnam Macedonia Kenya UAE Grenada Poland Lebanon Zambia Guatemala Romania Morocco Honduras Russia Mozambique Jamaica Serbia Namibia Mexico Slovak Republic Nigeria Panama Slovenia Oman Paraguay Turkey Qatar Peru Ukraine Rwanda Trinidad & Tobago Uruguay Venezuela Senegal South Africa Tanzania Tunisia UAE Zambia As of 28 February 215 Source: J.P. Morgan

6 Exhibit 5 Characteristics of the Most Widely Used EMD Indices JPM EMBI Global Diversified JPM CEMBI Broad Diversified JPM GBI-EM Global Diversified JPM ELMI+ Asset Class Hard Currency Hard Currency Corporate Local Currency Local Currency T-bills Duration (Years) 7.16 4.84 4.96.15 YTM (%) 5.57 5.2 6.34 4.58 Spread (bps) 369 36 N/A N/A IG Yield (%) 4.2 4.6 N/A N/A IG Spread (%) 218 234 N/A N/A HY Yield (%) 8.1 7.88 N/A N/A HY Spread (%) 639 648 N/A N/A # of Countries 63 49 16 22 # of Issuers 127 549 16 N/A # of Instruments 47 1166 197 N/A Market Cap (USD Billions) 675.8 88.7 915.9 N/A 215 YTD Performance (%) 2.1 2.36-3.96-2.41 214 Performance (%) 7.43 4.96-5.72-7.3 Credit Quality (Average) BBB- BBB BBB+ N/A IG 59.9 65.4 93.4 N/A HY 4.1 34.6 6.6 N/A A and above 22.4 27.3 37.9 N/A BBB 37.5 38.1 55.5 N/A BB 19.4 16.3 4.9 N/A B 14.8 9.1 1.7 N/A CCC and below 2.8 2.8. N/A Non Rated 3.1 6.4. N/A As of 31 March 215 Source: Bloomberg, Lazard The fact that all emerging markets debt indices are, in principle, calculated on the basis of US dollars is of critical importance for the overseas investor. Thus, for example, a euro zone investor with exposure to such an emerging markets debt index benchmark initially has currency risk. If the investor does not wish to leave this risk open, he must supplement the mandate to include currency hedging or draw upon benchmarks hedged in euros from the outset. The decision to hedge currency risk is not trivial. While the performance of the emerging markets debt benchmarks in US dollars over the last twelve years had largely corresponded to the value development of the indices hedged in euros (for a short period there were temporarily stronger deviations of the indices due to the hedging costs), the performance of the unhedged indices converted into euros strongly depended on the volatile US dollar/euro exchange rate.

7 Exhibit 6 Currencies Have Had a Significant Impact on Emerging Markets Debt Performance J.P. Morgan EMBI Global Index (November 212=1) 13 Euro 12 11 USD 1 9 Hedged in Euro Nov 212 Mar 213 Jul 213 Nov 213 Mar 214 Jul 214 Nov 214 Mar 215 As of 31 March 215 The JP Morgan Emerging Markets Bond Index Global (EMBI Global) tracks total returns for US dollar denominated debt instruments issued by emerging markets sovereign and quasi-sovereign entities: Brady bonds, loans, and Eurobonds. The index is unmanaged and has no fees. One cannot invest directly in an index. Source: Bloomberg, Lazard In periods of high currency volatility such as, for example, 213 (when the euro was strong) and the first quarter of 215 (when the euro was weak), the currency movement can be as critical a source of returns to a (non-currency-hedged) emerging markets debt mandate as the performance of the debt market itself (Exhibit 6). It is necessary to distinguish this US dollar risk for a euro investor, due to the listing of the index benchmark in US dollars, and the actual currency risk of the emerging markets debt local currency investments. If a euro zone investor grants an emerging markets local currency mandate according to the J.P. Morgan GBI-EM Global Diversified Index, for example, and decides in favor of the index hedged in euros as the benchmark, this merely means that the US dollar/ euro risk that is contained in the initial benchmark is hedged for the euro investor. The local currency risk of the Brazilian real, for example, contained in the index or bonds denominated in reals in relation to the US dollar remain unaffected because the investor has, by deciding in favor of an investment in emerging markets local currency bonds, specifically decided in favor of the local currencies of the emerging markets as the earnings driver. Since we have described the J.P. Morgan CEMBI indices in detail in a separate publication, Emerging Markets Corporate Bonds, we focus on the J.P. Morgan GBI-EM indices and the J.P. Morgan EMBI Index group below. 5 J.P. Morgan GBI-EM Indices for Local Currency Bonds The J.P. Morgan GBI-EM indices encompass a family of six indices that have existed since June 25 (calculated back to December 22) and differ from one another through the size of the investment universe, the minimum volume and liquidity, and the degree of diversification. 6 The investment universe is limited to government bonds in the local currencies of the emerging markets with minimum liquidity and minimum terms. J.P. Morgan first calculates the J.P. Morgan GBI-EM Broad Index, then the J.P. Morgan GBI-EM Global Index, and finally the J.P. Morgan GBI-EM Index. All three indices are also made available in a diversified version within a framework of slight modifications (Exhibit 7). The most comprehensive index variant with the most bonds and the lowest quality and liquidation restrictions is the GBI-EM Broad version of the indices. On the other side of the spectrum is the GBI-EM variant, which concentrates on the countries, currencies, and bonds that are the largest, most liquid, and most accessible and which are most easily replicable (for example, as benchmarks for ETFs).

8 Exhibit 7 The JPM GBI-EM Index Performance in US Dollars Index, 24=1 35 JPM GBI-EM Broad JPM GBI-EM Broad Div JPM GBI-EM JPM GBI-EM Global JPM GBI-EM Div JPM GBI-EM Global Div 25 15 1 5 24 26 28 21 212 214 As of 2 April 215 The JP Morgan Government Bond Index-Emerging Markets Global (GBI-EM Global) is a comprehensive, global local emerging markets index, and consists of regularly traded, liquid fixed-rate, domestic currency government bonds to which international investors can gain exposure. The index is unmanaged and has no fees. One cannot invest directly in an index. In the middle of the spectrum is the GBI-EM Global version, which attempts to take a middle path between a large universe and high flexibility and is also described by J.P. Morgan as the index of investable bonds. The diversified variants differ from the initial variants because the country and currency weightings of the base variants are changed by means of a sophisticated calculation methodology. The extremely high weighting of individual countries and currencies in the marketcapitalization-weighted initial index is reduced and limited to a certain maximal weighting. Smaller markets are given a greater weighting in the diversified index to achieve a more balanced country and currency diversification, even though the weighting does not necessarily reflect the actual market weighting. The J.P. Morgan GBI-EM Global Diversified Index is followed by most active managers, and we focus on it below. The market capitalization of this index has risen steadily in recent years, reaching about $916 billion (converted) in March 215 (Exhibit 8). From the standpoint of regional weighting, the index has 45% in Asia, followed by 25% in Europe, 2% in Latin America, and 1% in Africa (Exhibit 9). The number of countries in the J.P. Morgan GBI-EM Global Diversified Index was relatively narrowly limited to 16 countries in March 215; some countries, such as Malaysia, Poland, Brazil, South Africa, or Mexico, are limited to 1% (regular adjustment to market development), while their weighting according to market capitalization in the J.P. Morgan GBI-EM Global Index is substantially greater (Exhibit 1). The index s average yields were volatile in recent years and fluctuated between 5.22% and 8.99%, but they always offered a greater yield than the US and euro zone government bond markets. The duration of this index was always substantially below the duration of the bond indices of developed markets. Due, however, to falling interest rates and the growing ability of emerging markets countries to issue somewhat longer terms, the duration has gradually risen in recent years (Exhibit 11).

9 Exhibit 8 The JPM GBI-EM Global Diversified Index Has Grown Steadily (USD Billion) 1,2 8 4 24 26 28 21 212 214 As of 2 April 215 The JP Morgan Government Bond Index-Emerging Markets Global Diversified Index is a uniquely weighted version of the GBI-EM Global. It limits the weights of those index countries with larger debt stocks by only including specified portions of these countries eligible current face amounts of debt outstanding. The countries covered in the GBI-EM Global Diversified are identical to those covered by the GBI-EM Global Index. The index is unmanaged and has no fees. One cannot invest directly in an index. Exhibit 9 Regional Weighting of the JPM GBI-EM Global Diversified Index Weighting of Regions (%) 1 8 6 Middle East/Africa, last 9.92 Asia, last 2.4 Europe, last 24.85 4 2 Latin America, last 44.84 28 29 21 211 212 213 214 As of 2 April 215 Exhibit 1 Country Weightings in the JPM GBI-EM Global Diversified Index 12 1.44 1.8 1.5 9.8 9.73 9.22 8.82 8 7.71 7.4 5.33 4.8 4 2.45 1.85 1.73.78.47.11 Brazil Malaysia Poland Mexico South Africa Turkey Indonesia Thailand Colombia Russia Hungary Romania Peru Nigeria Colombia Global Phillipines Chile As of 21 April 215 Source: Bloomberg, Lazard

1 In contrast to the index of hard currency bonds, the J.P. Morgan GBI-EM Global Diversified Index is almost all investment grade. At the end of March 215, only two countries (Hungary and Nigeria) did not have an investment grade rating for their local currency issues; the high yield portion in the J.P. Morgan GBI-EM Global Diversified Index is below 7%. It should be noted that, particularly in the emerging markets, the country rating in local currencies is often higher than in foreign currencies, because issues in foreign currencies involve greater risks for the issuer. J.P. Morgan EMBI Indices for Hard Currency Bonds The J.P. Morgan EMBI index family encompasses three indices that differ from one another through the size of the investment universe, minimum volume and liquidity, and diversification. 7 The investment universe is limited to government bonds in the hard currencies of the emerging markets with minimum liquidity and minimum terms. J.P. Morgan first calculates the EMBI+ Index, secondly the EMBI Global Index, and thirdly the EMBI Global Diversified Index (Exhibit 12). Exhibit 11 Emerging Markets Bond Duration Has Gradually Risen JPM GBI-EM Global Diversified Index 1 9 Yield (%) 8 7 6 5 Duration (Years) 4 3 22 24 26 28 21 212 214 As of 31 March 215 Source: Bloomberg, Lazard Exhibit 12 Total Returns of the JPM EMBI Indices (%) 9 7 5 JPM EMBI+ JPM EMBI Global Div JPM EMBI Global 3 1 1994 1998 22 26 21 214 As of 21 April 215 The performance quoted represents past performance. Past performance does not guarantee future results. The index is unmanaged and has no fees. One cannot invest directly in an index.

11 J.P. Morgan s first emerging markets hard currency index, which was introduced in July 1995 and calculated back to December 1993, was the J.P. Morgan EMBI+ Index. Like all EMBI indices, it is weighted on the basis of the market capitalization of government bonds, but it is the sub-index with the greatest liquidity requirements, so some markets are excluded. The J.P. Morgan EMBI Global Index was introduced in July 1999, but likewise is calculated back to December 1993. It is somewhat more comprehensive, broader, and thus more representative than the EMBI+ Index. It also contains quasi government bonds and its country weightings are based on the normal market capitalization without weighting restrictions. This distinguishes it from the J.P. Morgan EMBI Global Diversified Index, which was simultaneously introduced with the same back-calculation, but reflects a restriction of country weightings, such that the large markets are weighted lower and the small markets are weighted higher than in the J.P. Morgan EMBI Global Index. The J.P. Morgan EMBI Global Diversified Index has become the market standard in active management. Therefore we will focus on this index benchmark. The market capitalization of this index has grown in recent years and reached $676 billion in March 215 (Exhibit 13). From a regional weighting standpoint the index is 36% in Latin America, 3% in Europe, 2% in Asia, 1% in Africa, and 4% in the Middle East (Exhibit 14). Exhibit 13 Market Capitalization of the JPM EMBI Global Diversified Index Has Grown Rapidly Since 29 (USD Billions) 75 6 45 3 15 1994 1996 1998 2 22 24 26 28 21 212 214 As of 21 April 215 The JP Morgan Emerging Markets Bond Index (EMBI Global Diversified) is a uniquely weighted version of the EMBI Global. It limits the weights of those index countries with larger debt stocks by only including specified portions of these countries eligible current face amounts of debt outstanding. The countries covered in the EMBI Global Diversified are identical to those covered by the EMBI Global. The index is unmanaged and has no fees. One cannot invest directly in an index. Exhibit 14 Regional Weightings for the JPM EMBI Global Diversified Index (%) 1 8 6 4 2 1994 1998 22 26 21 214 Middle East, last 3.78 Africa, last 9.96 Asia, last 19.64 Europe, last 3.21 Latin America, last 36.41 As of 21 April 215

12 The country portfolio is much more broadly diversified in the J.P. Morgan EMBI Global Diversified Index (63 countries) than in the local currency indices; the weightings of some large-volume countries such as Mexico, Brazil, Turkey, Venezuela, and Russia are limited in favor of smaller countries to improve diversification (Exhibit 15). The average yields of this index have been much more volatile in recent years than in the local currency index. It fluctuated between 4.3% and 11.%, but throughout offered greater yields than the US government bond market or the yields of the euro zone. In the past, the duration of this index was usually substantially lower than the duration of the bond indices of the developed world, but this has incrementally changed recently. Due to falling interest rates and the growing ability of the emerging markets countries to issue somewhat longer terms, the index s duration has risen steadily, such that it has nearly reached the duration of indices of the developed world (Exhibits 16 and 17). Exhibit 15 Weighting of Selected Countries in the JPM EMBI Global Diversified Index (%) Brazil, last 4.32 24 18 12 6 1994 1998 22 26 21 214 As of 21 April 215 Venezuela, last 1.91 Poland, last 3.6 Indonesia, last 4.49 Philippines, last 4.76 Russia, last 4.29 Turkey, last 4.6 China, last 4.13 Chile, last 3.37 Peru, last 3.7 Argentina, last 2.16 Mexico, last 4.42 Panama, last 2.53 Colombia, last 3.85 South Africa, last 3.31 Exhibit 16 Falling Interest Rates and Longer Terms Have Raised EM Bond Durations JPM EMBI Global Diversified Index 11 1 9 Yield (%) 8 7 6 Duration (Years) 5 4 22 23 24 25 26 27 28 29 21 211 212 213 214 As of 21 April 215 The performance quoted represents past performance. Past performance does not guarantee future results. The index is unmanaged and has no fees. One cannot invest directly in an index.

13 The quality of the government bonds in the J.P. Morgan GBI-EM Global Diversified Index has steadily improved. This is a result of the positive structural development of the emerging markets, and the percentage of securities with investment grade ratings has risen substantially, although this trend has declined somewhat in the course of the changed monetary policy in the United States since mid-213 and the drop in the price of oil since mid-214. But at any rate, about 6% of all bonds in the J.P. Morgan EMBI Global Diversified are investment grade today, and 4% are high yield (Exhibit 18). Exhibit 17 Yield Spread of the JPM EMBI Global Diversified Index over Bunds and US Treasuries Yield spread over 1-Year Treasuries and 1-Year Bunds (%) 12 8 4 Over Treasuries Over Bunds 1998 22 26 21 214 As of 21 April 215 The performance quoted represents past performance. Past performance does not guarantee future results. The index is unmanaged and has no fees. One cannot invest directly in an index. Exhibit 18 The Percentage of Investment Grade Issues in the JPM EMBI Global Diversified Index Has Risen over the Past Ten Years (%) 7 6 5 4 3 Jun 23 Feb 25 Oct 26 Jun 28 Feb 21 Oct 211 Jun 213 Feb 215 As of 31 March 215 Source: Bloomberg, Lazard

14 Summary and Outlook Over the past decade, emerging markets bond markets have increasingly drawn the focus of global investors as a higher-yield alternative to developed markets bonds. Emerging markets debt now plays a role even in the portfolios of many conservative investors. Initially, investors insisted on the hard currency emerging markets bonds, but increasingly local currency bonds are being included in portfolios. In recent years, not only investors, but markets themselves have further evolved. The emerging markets bond markets have grown steadily, and the investment universe has become broader. More and more countries, currencies, and issuers have been added, liquidity has grown, investors diversification opportunities have been expanded, and the quality of the issuers has improved. The emerging markets bond market has become a completely standard/strategic asset class for many investors. When a market has reached this stage of development, the number of necessary decisions for investors has also risen it is not sufficient to simply commit oneself to emerging markets debt as a capital investment. 8 Does the investor wish to implement a benchmark concept that is close to the index or does one desire active management vis à vis benchmarks and greater tracking error? Should the investor consider just hard currencies, or also local currencies? Should corporate bonds play a role? Is a blend concept that invests in a combination of currencies and issuers the right solution? Or perhaps a total return strategy independent of benchmarks is preferred, in order to limit the risks? 9 How should the investor deal with the diverse currency risk? An analysis of the emerging markets indices, as well as their evolution over the past several years into more diversified offerings, can help to better understand the market. The most widely used representatives of the various markets are the J.P. Morgan EMBI Global Diversified Index for government bonds in hard currencies, the J.P. Morgan CEMBI Broad Diversified Index for corporate bonds in hard currencies, and the J.P. Morgan GBI-EM Global Diversified Index for government bonds in local currencies. Viewed historically, hard currency investments as identified by the J.P. Morgan EMBI Global Diversified Index were favored by investors. For a long time they had a superior market size, the currency risk was easy to manage for euro and other global investors because of the strong focus on US dollars, and the portfolio on which the index is based is well diversified with 63 countries and 127 issuers. On the other hand, the index has become more efficient in recent years and has scarcely grown through new issues, such that it has become ever more costly and challenging for active managers to beat. On the other hand, ETF investments have a hard time generating the market yield, because they have to earn the bid-ask spreads and do not reflect the overall market. For some years, the strongest market growth has been posted in the J.P. Morgan CEMBI Broad Diversified Index for corporate bonds in hard currencies and the J.P. Morgan GBI-EM Global Diversified Index for government bonds in local currencies. Over the long term, these markets are seen as the actual emerging markets bond markets for investors and active managers, in which the investor may still be rewarded with illiquidity and inefficiency premiums. Currency management is accorded an important role for overseas investors. All emerging markets debt indices are listed in base form in US dollars and the investor must decide whether to hedge the currency exposure or leave it open.

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Notes 1 The JP Morgan Emerging Markets Bond Index Global (EMBI Global) tracks total returns for US dollar denominated debt instruments issued by emerging markets sovereign and quasi-sovereign entities: Brady bonds, loans, and Eurobonds. The JP Morgan Corporate Emerging Markets Bond Index Global (CEMBI Global) tracks total returns for US denominated corporate bonds issued by emerging markets entities. The JP Morgan Government Bond Index-Emerging Markets Global Diversified Index is a uniquely weighted version of the GBI-EM Global. It limits the weights of those index countries with larger debt stocks by only including specified portions of these countries eligible current face amounts of debt outstanding. The countries covered in the GBI-EM Global Diversified are identical to those covered by the GBI-EM Global Index. These indices are unmanaged and have no fees. One cannot invest directly in an index. 2 As of 214. Source: F. Schui: Austerität Politik der Sparsamkeit: Die kurze Geschichte eines grossen Fehlers [Austerity Policy of Frugality: The Short Story of a Big Mistake], Karl Blessing Verlag. 3 As of11 February 215. Source: S. Sanyal: The Random Walk Mapping the World s Financial Market 215, Deutsche Bank Research, White Paper. 4 As of 14 January 215. Source: P. Galdi: World Bond Market Growth Trends, Bank of America Merrill Lynch Bond Index Almanac, White Paper. 5 As of August 213. Source: W. Krämer; Emerging Markets Corporate Bonds, Lazard Asset Management, Hintergrund [Background]. 6 As of February 215. Source: G. Kim / S. Pithavadian: GBI-EM, JPMorgan Global Index Research, White Paper. 7 G. Kim: EMBI Global and EMBI Global Diversified, Rules and Methodology, JPMorgan Global Index Research, White Paper, May 213: G. Kim et al: EMBI+, EMBI Global, EMBI Global Diversified, JPM Global Index Research, JPM Fixed Income Index Products Guides, January 213. 8 As of March 212. Source: JPM: Digging Deeper, Emerging Market Debt Choices, J.P. Morgan Asset Management, White Paper. 9 As of July 211. Source: W. Krämer: Total Return-Konzepte mit Emerging Markets Debt [Total Return Concepts with Emerging Markets Debt], Lazard Asset Management, Hintergrund [Background]. Important Information Published on 16 November 215. 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 document and are subject to change. Equity securities will fluctuate in price; the value of your investment will thus fluctuate, and this may result in a loss. Securities in certain non-domestic countries may be less liquid, more volatile, and less subject to governmental supervision than in one s home market. 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