Pitchbook A4US template

1
M A Y   2 0 0 6
I N V E S T I N G   A C R O S S   T H E 
 E M E R G I N G   M A R K E T 
 C O R P O R A T E   A S S E T   C L A S S
S T R I C T L Y   P R I V A T E   A N D 
 C O N F I D E N T I A L
2
Structural changes in the Emerging Markets asset
class
1
1
Investing in US/EUR denominated EM corporates
2
17
Appendix
3
29
I N V E S T I N G   A C R O S S   T H E 
 E M E R G I N G   M A R K E T 
 C O R P O R A T E   A S S E T   C L A S S
1
3
EM debt had high returns punctuated by crises

• Early 1980s Latin Defaults
• Mid 1980s EM Debt Trading Commences
• March 1990 First Brady Plan (Mexico)

EMBI Global Diversified Total Return Index
Dom Rep Restructuring (May 05)
ArgentinaDefault (Dec 01)
RussiaDefault (Aug 98)
AsiaCrisis (mid-97)
BrazilDevaluation (Jan 99)
PakistanRestructuring (Dec 99)
FirstBrady Exchange(Mexico- Apr 96)
Argentina Restructuring (Jun 05)
MexicoTequilaCrisis (94-95)
S T R U C T U R A L   C H A N G E S   I N 
 T H E   E M E R G I N G   M A R K E T S 
 A S S E T   C L A S S
Uruguay Restructuring (Apr 03)
UkraineDefault (Jan 00)
Mexico getsInvestment Grade (Moodys- Mar 00)
EcuadorDefault (Aug 99)
Source JPMorgan.
2
4
... yet with higher returns from EM debt than
from other assets in the long run
EMBI Global Diversified Total Return Index
EMBIGD
SP 500
Eur Eq.
US HY
S T R U C T U R A L   C H A N G E S   I N 
 T H E   E M E R G I N G   M A R K E T S 
 A S S E T   C L A S S
Source JPMorgan.
3
5
A structural decline in Emerging Markets
contagion?
Argentinas 2001 default was the biggest default
in history, yet there was little volatility

• We believe that there has been a structural
  decline in contagion that has been driven by
• improvements in the asset class
• 1) a more diversified asset class,
• 2) improved credit ratings and instrument types,
• 3) abandonment of fixed exchange rates,
• 4) greater FX reserves,
• 5) convergence to Europe US,
• 6) better quality of information
• improvements in the investor base
• 1) a broadening investor base,
• 2) less leverage and more buy and hold investors

6m EMBIGD volatility (daily returns)
Tequilacrisis
Russiadefault
Arg default - only a small increase
in volatility
Asiacrisis
USTs
S T R U C T U R A L   C H A N G E S   I N 
 T H E   E M E R G I N G   M A R K E T S 
 A S S E T   C L A S S
Brazil
Fed

• Furthermore, shocks have toughened the asset
  class
• 94 Mexico devaluation
• 97 Asia devaluations
• 98 Russia default
• 99 Brazil devaluation
• 01 Argentina default

There will still be shocks but they should be
less frequent and have less magnitude
4
6
A structural decline in Emerging Markets
contagion? 2001 vs 1998
1998 return on EMBIG country components - The
year of the Russia default
2001 return on EMBIG country components - The
year of the Argentina default
S T R U C T U R A L   C H A N G E S   I N 
 T H E   E M E R G I N G   M A R K E T S 
 A S S E T   C L A S S
Source JPMorgan
5
7
Increased current account and FX reserves
Structural changes

• Emerging Markets are in much stronger economic
  health from a decade ago.
• Stricter monetary fiscal policies, and robust
  trade flows in a commodity driven environment
  have led to strong current account surpluses and
  foreign-exchange reserves
• EM better able to withstand adverse global
  shocks.
• Total FX reserves have increased in the largest
  EMBIGD weights.
• Increase is not just at the aggregate level but
  is consistent at the country level too.

S T R U C T U R A L   C H A N G E S   I N 
 T H E   E M E R G I N G   M A R K E T S 
 A S S E T   C L A S S
Source JPMorgan
6
8
Abandonment of fixed exchange rates
Structural changes

• A move to a floating exchange rate should reduce
  the risks of
• a growing mismatch between holding local assets
  borrowing debt (e.g. 97 Asian carry trade),
• a run on reserves, and
• a liquidity crisis triggering default
• Major crises in EM have toppled one fixed regime
  after another
• 1994 Mexico
• 1997 Asia (Indonesia, Thailand, Korea)
• 1998 Russia
• 1999 Brazil
• 2000 Turkey
• 2002 Argentina
• 2002 Uruguay
• 2002 Venezuela (now moved back to fixed)
• Since 1996, 21 EM countries have moved towards a
  more floating exchange rate regime. Only 3 have
  gone in the other direction (Bulgaria, Ecuador,
  and Venezuela)

S T R U C T U R A L   C H A N G E S   I N 
 T H E   E M E R G I N G   M A R K E T S 
 A S S E T   C L A S S
7
9
Improved credit ratings and instrument types
Structural changes

• EMBIGD index has shown a steady improvement in
  credit quality.
• The investment grade portion has increased from
  3 to 37 while the CCC below, unrated portion
  has fallen from 25 to 4
• The instrument quality has improved
• Theres been a big increase in the weight of
  unrestructured bonds.
• Collateralized bonds (which typically traded at a
  high spread because their structure is complex
  and they bundle sovereign risk with UST risk)
  have been replaced by new plain vanilla bond
  issues that are more investor friendly.
• There has been a sharp decline in loans as a
  percentage of the total outstanding

CCC below, unrated
B rated
BB rated
Mexico upgrade
Russia upgrade
Korea graduates out of the index
Investment Grade
Source JPMorgan
S T R U C T U R A L   C H A N G E S   I N 
 T H E   E M E R G I N G   M A R K E T S 
 A S S E T   C L A S S
Loans
Restructured Collateralised
Restructured Uncollateralised
Unrestructured Bonds
Source JPMorgan.
Source JPMorgan.
8
10
Broadening Investor Base
Structural changes
Client Investor base, Jan Dec 1996 vs. 2005
(average)

• EM Strategic Inflows totaled 10bn year-to-date.
  Retail flows have slowed amid weaker total return
  performance (mostly due to UST sell off).
• Inflows are higher quality and more diversified,
  mainly investment grade investors who have a
  different set of investment objectives than the
  traditional dedicated EM investor
• Traditional pension funds
• Central Bank allocations
• Mid East petrodollars
• Asian retail
• Also, High Grade managers have more EM in their
  portfolio following upgrades to investment grade.
  
• For 2006, we forecast strategic inflows to be
  around 15-20bn and another 10bn from mutual
  funds. Estimate risks are to the upside,
  especially in light of new retail EMBI funds to
  be launched later this year in Japan.

Source JPMorgan
AUM (mm) Benchmarked to EMBI Indices, JPM Client
Survey
S T R U C T U R A L   C H A N G E S   I N 
 T H E   E M E R G I N G   M A R K E T S 
 A S S E T   C L A S S
Source JPMorgan
9
11
For Latin America, solid GDP growth dynamics of
2005 should carry over into 2006, underpinning a
4.7 expansion this year
Emerging markets GDP growth by region ( YOY)
Global economic growth ( YOY)
S T R U C T U R A L   C H A N G E S   I N 
 T H E   E M E R G I N G   M A R K E T S 
 A S S E T   C L A S S
Source JPMorgan
10
12
Latin Americas growth has decoupled from capital
flows swings, and is now driven more by exports
Growth rate and private capital inflows
Latin growth is now more linked to export
performance
oya
US billion
oya
oya, US terms
Regional real GDP growth
Regional real GDP growth
Export growth
S T R U C T U R A L   C H A N G E S   I N 
 T H E   E M E R G I N G   M A R K E T S 
 A S S E T   C L A S S
Capital inflows
Source JPMorgan
Source JPMorgan
11
13
Current account surpluses and more conservative
fiscal policies have helped lift Latin Americas
saving rate..
Latin America saving rate and terms of trade
Latin America fiscal balance and primary surplus
1990100
of GDP, both scales
of GDP
Headline fiscal balance
Gross saving
Terms of trade
Primary fiscal balance
S T R U C T U R A L   C H A N G E S   I N 
 T H E   E M E R G I N G   M A R K E T S 
 A S S E T   C L A S S
Source JPMorgan
Source JPMorgan
12
14
and to steadily improve external debt ratios and
external liquidity indicators reducing the
regions vulnerability
Latin America external debt ratios- , both
scales
Latin America FX reserves and debt service
Ratio
US billion
External debt/ CA revenues
US billion
Fx reserves
Fx reserves/ following years debt service
S T R U C T U R A L   C H A N G E S   I N 
 T H E   E M E R G I N G   M A R K E T S 
 A S S E T   C L A S S
External debt/ GDP
Source JPMorgan
Source JPMorgan
13
15
Some negatives for EM from a strategic perspective

• Theres no Chapter 11 for sovereigns but . . .
  
• There are ways of restructuring (e.g. Dominican
  Republic, Paraguay, Uruguay).
• Issuers are now using Collective Action Clauses
  (e.g. Mexico, Brazil, Uruguay).
• Moodys says that average recovery rates for
  defaulted sovereign senior unsecured bonds have
  been higher than recovery rates for defaulted
  corporate issuers.
• EM sovereigns arent exposed to potential
  Sarbanes-Oxley claims of US corporates.
• Losses on EMBI/EMBIGD from EM defaults have been
  just 1.2 p.a. (Dec 90 to Mar 06).
• Diversification within the EM markets has
  decreased
• This is partially a result of tighter spreads, so
  total return is increasingly driven by UST
  performance
• Even on a spread basis though, diversification is
  lower as investors have moved to higher spread
  countries to generate yield, increasing
  correlation
• Correlation with other asset classes has also
  increased
• but the volatility of returns has decreased,
  improving the use of EM external debt as cheap
  beta
• Some External Debt is a dying asset class
  because issuers will fund more in local markets,
  but
• Shortage of supply in external debt US
  investment grade paper, as well as strong
  investor inflows should continue benefiting the
  asset class
• Investors have been getting more involved in
  local markets
• Other Risks Going Forward
• Heavy 2006 Political Calendar
• Avian Flu
• Spotlight on the Middle East and Oil - Iraq,
  Iran, Nigeria
• Threat of Growing US Protectionism - China

S T R U C T U R A L   C H A N G E S   I N 
 T H E   E M E R G I N G   M A R K E T S 
 A S S E T   C L A S S
Source Moodys Investors Service, April 2006
14
16
Historical valuation spreads are tight
external debt is expensive
EMBI/EMBIG Spreads
EMBIG Spreads
Source JPMorgan. We take the EMBI spread upto
Dec 1997 and the EMBIG spread thereafter.
S T R U C T U R A L   C H A N G E S   I N 
 T H E   E M E R G I N G   M A R K E T S 
 A S S E T   C L A S S

• EMBIG spreads hit a record spread this year of
  174 bps (May 1st, 2006).
• Despite considerable volatility experienced in
  the past few weeks, the current headline EMBIG
  spread has stayed in a relatively narrow range of
  174-200 bps, testing record spreads a few times
  this year.
• The Argentine restructuring cut approx 60bp off
  the index spread. Adjusted for Argentina, the
  tightest headline spread was 168 bps on the EMBIG
  (May 1st, 2006), compared with the current spread
  of 191 bps (May 1st, 2006).
• EM is still an under-owned asset class by many
  pension funds and central banks

15
17
Wide basis more value in CDS than cash bonds
5 Yr Bond Basis for EM Sovereigns (Mid Prices)
S T R U C T U R A L   C H A N G E S   I N 
 T H E   E M E R G I N G   M A R K E T S 
 A S S E T   C L A S S
Source JP Morgan, 31st March 2006

• Wide basis shows there is more value in taking
  risk via EM Credit Default Swaps than via bonds.
• Basis tends to be directional. It has rallied as
  EM spreads have tightened, but remains wide in
  comparison with US credit markets (where basis is
  rarely above 10bp for BBB bonds).
• One reason for wide basis in EM is market
  segmentation the difficulty of local investors
  to participate in the CDS market vs the cash
  market due to counterparty risk of CDS
  transactions. Another reason is due to the
  special repo effect of sovereign bonds that drive
  demand and narrow spreads.
• But we expect basis to remain on a long term
  narrowing trend, driven by 1) more institutional
  investors switching to taking risk via CDS, 2)
  more synthetic structured product transactions
  taking risk via CDS and 3) more investors taking
  risk via Credit Linked Notes.

16
18
Investing in US/EUR denominated EM corporates
Structural changes in the Emerging Markets asset
class
1
1
2
17
Appendix
3
29
I N V E S T I N G   A C R O S S   T H E 
 E M E R G I N G   M A R K E T 
 C O R P O R A T E   A S S E T   C L A S S
17
19
Investing in EM corporates

• ADDING ALPHA Emerging market corporate debt
  offers the opportunity to add alpha to sovereign
  emerging market debt as well as to non-emerging
  market portfolios
• GROWING SCALE The asset class has grown to a
  size too large to ignore, about 150 billion or
  half the size of the EMBIG. The mix of the
  total stock of emerging market debt is shifting
  toward corporates
• GREATER VALUE Value is likely to persist in
  corporates and we expect investor allocations to
  continue growing as the attractiveness of
  sovereign yields declines
• GLOBAL PLAYS Opportunities are global and there
  are diversification benefits across regions,
  across countries and also within countries
• BUT LOCAL ANALYSIS REQUIRED Careful security
  selection and bottom-up analysis are of paramount
  importance
• LIQUIDITY liquidity remains a key concern, among
  other risks

I N V E S T I N G   I N   U S  / E U R 
 D E N O M I N A T E D   E M   C O R P O R A T E S
18
20
The EM corporate asset class has grown to a size
too big to ignore
Size and composition of the asset class

• Total market cap. in the EM corporate asset class
  is approximately US147 billion with Latin
  America representing the largest sector at 49,
  and CEEMEA and Asia at 25 and 26, respectively
• Principal sectors include energy, financials and
  communications
• Latin business split evenly between high grade
  and high yield, but CEEMEA more high yield and
  Asia more high grade
• Latin and Asian markets more geographically
  diversified versus CEEMEA where Russia comprises
  78 of market
• EMBIG market capitalization as ofMarch 31, 2006
  was US292 billion

EM Corporate Market Capitalization
billion
I N V E S T I N G   I N   U S  / E U R 
 D E N O M I N A T E D   E M   C O R P O R A T E S
Source JPMorgan
19
21
Key characteristics of the EM corporate asset
class by region
High Yield CreditsGeographic Distribution (US
billion)
High Grade CreditsGeographic Distribution (US
billion)
I N V E S T I N G   I N   U S  / E U R 
 D E N O M I N A T E D   E M   C O R P O R A T E S
Source JPMorgan
20
22
EM corporate indices have outperformed the US HY
index
Cumulative total return indices
I N V E S T I N G   I N   U S  / E U R 
 D E N O M I N A T E D   E M   C O R P O R A T E S
Source JPMorgan
21
23
... yet the (more volatile) EM equities have
outperformed EM corporate fixed income markets in
2006 YTD
2006 YTD¹ returns ()
I N V E S T I N G   I N   U S  / E U R 
 D E N O M I N A T E D   E M   C O R P O R A T E S
Source JPMorgan ¹ As of May 18, 2006
22
24
EM corporate issuance is on the rise
EM corporate issuanceCorporates and banks (US
million)
I N V E S T I N G   I N   U S  / E U R 
 D E N O M I N A T E D   E M   C O R P O R A T E S
2006YTD¹
Source JPMorgan ¹ As of May 12, 2006
23
25
outstripping sovereign issuance in 2006 as it
did in 2005
US billion
I N V E S T I N G   I N   U S  / E U R 
 D E N O M I N A T E D   E M   C O R P O R A T E S
Source JPMorgan ¹ As of May 15, 2006
24
26
EM corporate investor base has broadened
Client investor base JanuaryDecember 2001
(average)
Client investor base JanuaryDecember 1998
(average)
Brokers and dealers2
Other7
Other20
Prop trading3
Macro and dedicatedhedge funds19
Macro and dedicatedhedge funds30
Prop trading5
High grade investor26
Dedicated mutual funds17
High grade investor9
Dedicated mutual funds14
Latin accounts11
Non U.S. financial institutions15
Latin accounts11
Non U.S. financial institutions11
Client investor base JanuaryDecember 2005
(average)
Client investor base JanuaryDecember 2004
(average)
Brokers and dealers4
Brokers and dealers3
Other3
Other4
I N V E S T I N G   I N   U S  / E U R 
 D E N O M I N A T E D   E M   C O R P O R A T E S
Prop trading5
Prop trading4
Macro and dedicatedhedge funds32
Macro and dedicatedhedge funds40
High grade investor22
High grade investor27
Latin accounts5
Dedicated mutual funds14
Latin accounts6
Dedicated mutual funds11
Non U.S. financial institutions11
Non U.S. financial institutions9
Source JPMorgan
25
27
Improving EM corporate credits
Emerging markets corporate rating actions
I N V E S T I N G   I N   U S  / E U R 
 D E N O M I N A T E D   E M   C O R P O R A T E S
Source SP and JPMorgan ¹ Total number of
downgrades/total rating actions. A ratio of 50
or lower indicates more upgrades than downgrades
and vice-versa ² As of April 19, 2006
26
28
Spreads for benchmark bonds by region
10-year benchmark bonds by rating
I N V E S T I N G   I N   U S  / E U R 
 D E N O M I N A T E D   E M   C O R P O R A T E S
Source JPMorgan, Bloomberg, Moodys, SP
27
29
Top picks by Region
Asia
CEEMEA
Latin America

• High grade
• Hutchison Whampoa 7.45 33 (Hong Kong)
• High yield
• Avago 11.875 15 (Singapore)
• CM Corp. 8.10 16 (Korea)

• High yield
• Gazprom 9.625 13 (Russia)
• Gazprombank 6.5 15 (Russia)
• Russian Std. Bank 8.125 08 (Russia)
• Vimpelcom 8 10 (Russia)
• Evraz 8.25 15 (Russia)
• Kyivstar 7.75 12 (Ukraine)

• High grade
• Arauco 5.625 15 (Chile)
• CVRD 8.25 34 (Brazil)
• America Movil 5.75 15 (Mexico)
• High yield
• Fertinitro FRN 11 (Venezuela)
• Galicia 4 14 (Argentina)
• HPDA Step-up 13 (Argentina)

I N V E S T I N G   I N   U S  / E U R 
 D E N O M I N A T E D   E M   C O R P O R A T E S
28
30
Appendix
Structural changes in the Emerging Markets asset
class
1
1
Investing in US/EUR denominated EM corporates
2
17
3
29
I N V E S T I N G   A C R O S S   T H E 
 E M E R G I N G   M A R K E T 
 C O R P O R A T E   A S S E T   C L A S S
29
31
Latin America High Yield
Yield Map
A P P E N D I X
Source JPMorgan
30
32
Latin America High Yield
Yield Map
A P P E N D I X
Source JPMorgan
31
33
Latin America Mexico High Yield
Yield Map
A P P E N D I X
Source JPMorgan
32
34
Latin America Brazil High Yield
Yield Map
A P P E N D I X
Source JPMorgan
33
35
Latin America Argentina High Yield
Yield Map
A P P E N D I X
Source JPMorgan
34
36
Asia High Yield
Yield Map
A P P E N D I X
Source JPMorgan and Bloomberg
35