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History of Emerging Markets Investing

• The Emerging Markets
• Emerging Markets Debt
• Asset Types
• Risks
• Investment Criteria
• Expectations of a sustained economic growth

The Emerging Markets

• 45 Nations classified as Emerging Economies
• Total Outstanding: $350 Billion
• Population of about 2.6 Billion (1992), is in excess of 2/3 of world's total
• GDP of $3.5 Trillion (1991)
• Growth rate of 5% (1991)
• Most economically diverse group
• Fastest growing region
• Economies and infrastructure substantially underdeveloped

How Emerging Market debt compares to other non-investment grade instrument

• Total return range of between -17% to +32%
• Yield pickup due to risk premium (high yield spread to US Tsy)
• Opportunity for capital gains: deeply discounted
• Comparable to US high yield market
• As portfolio diversification tool to achieve favorable returns relative to substantial risks

Asset Types

• Brady Bonds
• Collateralized bonds created as part of national debt restructuring
• Sovereign Bank Loans
• New restructuring issues - exchange bonds
• Local market debt instruments
• New issue capital markets instruments for sovereign, public sector and corporate borrowers

Asset Risk: High potential returns tempered by inherent risks

• Evaluation of restructure history of defaulted sovereign loans
• Continued heavy indebtedness of many emerging nations
• Potential for political uncertainty
• Imperfect fundamental data and research information
• Non-standard and reduced disclosure requirements
• Possible enforcement difficulties
• Limited remedies in the event of default
• Investors need to consider portfolio diversification and investment selectivity

Investment evaluation criteria:

• Credit fundamentals
• Improving investment quality
• Growth potential of reformed economies
• Yield relative to B through BB credit quality
• Increased market liquidity

Reasons for expecting sustained economic growth:

• Deregulation of key industries ( trasportation, Oil )
• Privatization of key industries ( airline, telcom, banking)
• Introduction of fiscal prudence
• Removal of price subsidies
• Reduction of trade barriers
• Introduction of tight fiscal and monetary policies
• Enhanced international competitiveness
• Stabilization of exchange rates
• Manageable inflation
• Increased resources available to the private sector
• Decreasing foreign debt burden
• Reliable and viable investment alternatives
• Expanding consumer base
• Skilled and competitive labor force