Emerging Market Debt:The Opportunity SetApril 2011

Kevin Daly Portfolio Manager, Emerging Market DebtAberdeen Asset Management, London

Aberdeen Asset Management is the marketing name in the US for the following affiliated, registered investment advisers: Aberdeen Asset Management Inc., Aberdeen Asset Management Investment Services Ltd., Aberdeen Asset Management Ltd and Aberdeen Asset Management Asia Ltd (collectively, the “Aberdeen Advisers”). Each of the Aberdeen Advisers is wholly owned by Aberdeen AssetManagement PLC. "Aberdeen" is a U.S. registered service mark of Aberdeen Asset Management PLC.

1

Emerging Market Debt (“EMD”): The Opportunity Set

• Consensus trade

• Evolution of the asset class

• Improving credit fundamentals

• Valuations – is all the good news priced in?

• Enhancing your fixed income portfolio with EMD

• Risks

• Outlook

2

The consensus trade

2010 inflows into EM debt funds reached a record breaking US$75 billion

Source: JP Morgan, January 2011

US$ billion (yearly, cumulative)

70

60

50

40

30

20

10

0

-10

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2006 2007 2008 2009 2010

75.1

46.2

41.9

34.5

-3.6

80

3

EM local debt market capitalization now more than triple the size of EM external debt

0

250

500

750

1,000

1,250

1,500

Jan

02

Jan

03

Jan

04

Jan

05

Jan

06

Jan

07

Jan

08

Jan

09

Jan

10

Jan

11

US$bn

Corporate – CEMBI BroadSovereign – EMBI GlobalLocal – GBI-EM Broad

33

EMD has evolved over the past decade

Source: JP Morgan, 31 January 2011

GBI-EM Broad 65%, EMBI Global 19%, CEMBI Broad 16%

GBI-EM Broad$1,415.5bn

EMBI Global$403.5bn

CEMBI Broad$346.7bn

4

Development of local markets reduced risks in EM world

Source: UBS, Bloomberg April 2011* Data markers represent available yields

Select EM local currency yield curves*

Maturity (Years)

Yield to maturity (%) MexicoSouth Africa PolandBrazil Malaysia14

12

10

8

6

4

2

0

0.25 0.5 1 2 3 4 5 6 7 8 9 10 15 20 30

5

US$ billion

Source: JP Morgan, February 2011For illustrative purposes only

EM corporate issuance double sovereign issuance

• The EM corporate bond market is increasingly relevant as issuance has been double that of sovereigns over the past few years; a natural consequence of EM sovereigns with improving credit fundamentals and less funding needs, and corporates in those countries now a compelling credit story and able to issue debt in capital markets

4.0x

2.2x

4.8x

0.2x 0.3x

0.4x1.3x

1.1x1.3x

2.2x

1.8x

2.8x

0

20

40

60

80

100

120

140

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110.0x

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

EM Sovereign EM Corporates EM Quasi-sovereign Issuance Multiple of Corp & QS over Sov

6

EMD now an investment grade asset class

EMBIG reached IG early in 2010

Source: J.P Morgan, January 2011

EM sovereign debt has shown steady improvement in credit quality

Source: J.P Morgan, Jan 2011

Rating EMBIG Moody’s EMBIG S&P EMBIG Avg

BB-/Ba3

BB/Ba2

BB+/Ba1

BBB-/Baa3

BBB/Baa2

1994 1996 1998 2000 2002 2004 2006 2008 2010

% of market capitalization BB B RIG

100%

80%

60%

40%

20%

0%

1993 1995 1997 1999 2001 2003 2005 2007 2009

7

Ratings quality of emerging market countries underappreciated

S&P breakdown of EMBIG Diversified

BBB45.1%

B11.2%

A11.6%

NR1.5%

BB30.6%

S&P breakdown of GBI EM Global Diversified

AA0.1%

BB20.0%

A50.0%

BBB29.9%

• Hard currency index is 57% investment grade • Local currency index is 80% investment grade

Source data: JP Morgan, January 2011

8

General Government Debt (% GDP) vs Government Balance (% GDP)

Channels of contagion: Sovereign debt iceberg

Source: Moody's database, Fitch database, RBS, December 2010

General Government Balance for 2010 (% of GDP)

0%

20%

40%

60%

80%

100%

120%

140%

160%

Gro

ss G

ener

al G

over

nmen

t Deb

t fo

r 201

0 (%

of G

DP

)

Lebanon

Greece

Portugal

Cyprus

Italy

Japan

Kazakhstan

Ecuador Australia

Chile

Egypt

Spain

NorwayMalaysia

SwitzerlandTaiwanSweden

Luxembourg

China

Iceland

Ireland

Germany

Netherlands

France Hungary

MaltaCanada

RussiaEstonia

Austria

Venezuela

Philippines

FinlandKorea

Lithuania

Ukraine

SloveniaCzech

US

Saudi Arabia

New ZealandSouth Africa

CroatiaSlovakia

UK

Belgium

Eurozone

India Israel

Brazil ArgentinaPolandLatviaTurkey

ThailandDenmark

IndonesiaPeru

Colombia

MexicoRomania

-13% -11% -9% -7% -5% -3% -1% 1% 3% 5% 7%

Risk Increases

Japan's Govt. Debt is 225%

Eurozone G10 Asia CEEMEA LatAm

9

Does EMD offer value?

Reasonable credit valuations EM currency valuations not universally stretched

Note: ‘EM sovereign’ represent is the simple average for Brazil, Colombia, Indonesia, Hungary, Korea, Mexico, Philippines, Poland, Russia, South Africa and TurkeySource: Bloomberg, Barclays Capital, January 2011

CDX.NA.IG EM sovereigns

Jan 07 Jan 08 Jan 09 Jan 10

0

100

200

300

400

500

600

700

800REER, GDP weighted regionalaverages (Dec 07 =100)

Source: BIS, Barclays Capital, January 2011

LatAm EMEA Asia ex-China

2005 2006 2007 2008 2009 2015

80

85

90

95

100

105

110

10

Local yields looking even more appealing

Local currency debt offers higher yield than hard currency

Source: JP Morgan, February 2011

0

2

4

6

8

10

12

14

Jan

03

Apr

03

Jul 0

3

Oct

03

Jan

04

Apr

04

Jul 0

4

Oct

04

Jan

05

Apr

05

Jul 0

5

Oct

05

Jan

06

Apr

06

Jul 0

6

Oct

06

Jan

07

Apr

07

Jul 0

7

Oct

07

Jan

08

Apr

08

Jul 0

8

Oct

08

Jan

09

Apr

09

Jul 0

9

Oct

09

Jan

10

Apr

10

Jul 1

0

Oct

10

Jan

11

Yield (%) GBI-EM GD EMBIGD

11

Country 10 Year Bond Yield (%) Inflation yoy (%) Real yield Credit rating S&P

Brazil 12.8 6.3 6.5 BBB+

Colombia 8.1 3.2 5.0 BBB+

Egypt 14.6 11.5 3.1 BBB-

Hungary 7.1 4.5 2.6 BBB-

Indonesia 7.6 6.7 0.9 BB+

Malaysia 4.1 2.9 1.2 A+

Mexico 7.3 3.0 4.3 A

Peru 6.8 2.7 4.1 BBB+

Poland 6.3 4.3 2.0 A

Russia 7.8 9.5 -1.7 BBB+

South Africa 8.5 3.7 4.8 A+

Thailand 3.7 3.1 0.5 A-

Turkey 9.1 4.0 5.1 BB

US 3.5 2.1 1.4 AAA

UK 3.7 4.0 -0.3 AAA

Germany 3.4 2.1 1.3 AAA

Japan 1.3 0.0 1.3 AA

Source: S&P, Bloomberg, April 2011

Generally higher real yields than in developed markets

12

Efficient Frontier Longer timeframe

Benefits from EMD exposure

Source: Citigroup, JP Morgan, Aberdeen Asset Management, April 2011 Source: Citigroup, JP Morgan, Aberdeen Asset Management, April 2011

100% C it igro up WGB I A ll M aturity

100% Eff ic ient P o rt fo lio

62% C it igro up, 38% Eff ic ient

5%

6%

7%

8%

9%

10%

11%

12%

13%

6.0% 7.0% 8.0% 9.0% 10.0%

Annualised Volatility

Ann.

Ret

urn

Efficient portfolio (80% JPM EM- 20% JPM GBI-EM) vs Citigroup WGBI All Maturity (Jan 03 to Oct 10)

JPM EM Bond EMBI Global Diversified vs CitiGroup WGBI All Maturities (Jan 94 to Oct 10)

76 % C it igro up, 24 % JP M EM

B o nd

100% JP M EM B o nd EM B I Glo b D iv.

100% C it igro up WGB I

3%

5%

7%

9%

11%

13%

15%

4% 6% 8% 10% 12% 14%

Annualised Volatility

Ann.

Ret

urn

13

EM inflation may have peaked as well Comparison of current year-on-year inflation with average year-on-year inflation in 2006 and 2007

Are inflation concerns overdone?

Annualized 3-month change in seasonally adjusted price indices for the EM world as a whole*Source: Credit Suisse Locus Feb 2011

As of 1 April 2011. Large purchase occurring 6 Oct 09 was in expectation of inflows due for Santander IPO. Full amount is off the axis, at 4bnSource: Credit Suisse April 2011

Year

-on-

year

CP

I inf

latio

n in

%

0

Bra

zil

Chi

le

Col

umbi

a

Mex

ico

Cze

ch Hun

gary

Isra

el Pol

and

Turk

ey*

SA

Chi

na

Indo

nesi

a*

Kor

ea*

Mal

aysi

a

Phi

lippi

nes

3

6

9

12

-2

0

2

4

6

8

10

12

14

Aug 08 Feb 09 Aug 09 Feb 10 Aug 10 Feb 11

Feb 11 CPI inflation* Avg 2006 - 2007 inflationHeadline CPI* Food CPI Core inflation*

14

So what’s priced in?

Source: JP Morgan, Bloomberg, 12 April 2011

Market is expecting tightening across a range of emerging economies – in general by more than we expect

Priced interest rate moves: the market’s expected tightening from selected central banks over the next 12 months (in bp)

Generally we have seen tightening, apart from where a focus on the exchange rate has led to cuts

Note: For Thailand we have not adjusted for the policy rate to fixing spreadSource: Bloomberg, Barclays Capital, January 2011

What was priced in 1yr agoWhat has been delivered in last year

Bra

zil

Chi

le

Isra

el

Thai

land

Can

ada

Turk

ey

Indi

a Mex

ico

Kor

ea

Aus

tralia

Nor

way

Swed

en

Indo

nesi

a

Sou

th A

frica

Rus

sia

400

300

200

0

100

-100

-200

bps

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Turk

eyP

olan

dS

outh

Afri

caC

hina

Mex

ico

Bra

zil

Indi

aE

CB

Sou

th K

orea

Per

uU

KR

ussi

aA

mer

ica

Aus

tralia

Mal

aysi

aH

unga

ryTh

ai B

aht

Indo

nesi

aJa

pan

15

China – overtightening risk?

Chinese hard landing may be a low probability, but…

Source: Bloomberg, April 2011

0

5

10

15

20

25Ja

n 00

Mar

06

Jun

06

Aug

06

Oct

06

Dec

06

Mar

07

May

07

Aug

07

Oct

07

Dec

07

Mar

08

May

08

Jul 0

8

Oct

08

Dec

08

Feb

09

May

09

Jul 0

9

Sep

09

Dec

09

Feb

10

Apr 1

0

Jul 1

0

Sep

10

Nov

10

Feb

11

Apr 1

1

RR

R (%

)

4.0

4.5

5.0

5.5

6.0

6.5

7.0

Lend

ing

rate

(%)

China Required Deposit Reserve Ratio for Major Banks China 6 Month Best Lending Rates

16

So this isn't a USD/QE2 story?

So what happens to risk assets when QE2 is complete?

50

60

70

80

90

100

110

120

130

Sep 09 Nov 09 Feb 10 Apr 10 Jun 10 Sep 10 Nov 10 Jan 11 Mar 11

$ pe

r bar

rel

220

240

260

280

300

320

340

360

380

Inde

x le

vel

Oil (brent) CRB index

A ugust 27th - Jackso nho le speech - QE2 likely

M arch 31st - end o f QE1

A ugust 10th - F ed will re invest principal payments

N o vember 3rd- start o f QE2

Source: Bloomberg, April 2011

17

Spanish spreads are diverging from the troubled periphery

Reduced Eurozone peripheral risk

Source: Credit Suisse, April 2011

Spain Portugal Ireland

0

10 year sovereign spread to Germany, asset swap basis, basis points

100

200

300

400

500

600

700

Dec 09 Mar 10 Jul 10 Sep 10 Dec 10 Apr 11

18

EMD 2011 outlook: Aberdeen believes:

• Emerging market growth story is intact and inflation pressures moderating

• China growth slowing at the margin, but will remain supportive for commodity prices and EM exports

• Hard currency debt: spreads still attractive given low default risk, corporates poised to outperform

• Local currency debt: selective opportunities following curve steepening

• Policy makers likely to tolerate currency appreciation amid rising headline inflation

• Flow picture improving following big global emerging market outflows early in the year

• Risks: Rising UST yields, emerging market inflation, commodity prices, Eurozone peripherals

19

Aberdeen’s emerging market closed-end funds

Single Country

• Aberdeen Chile Fund, Inc. (NYSE: CH)

• Aberdeen Israel Fund, Inc. (NYSE: ISL)

• Aberdeen Indonesia Fund, Inc. (NYSE: IF)

Global

• Aberdeen Global Income Fund, Inc. (NYSE: FCO)

• Aberdeen Emerging Markets Telecommunications and Infrastructure Fund, Inc. (NYSE: ETF)

Regional

• Aberdeen Asia-Pacific Income Fund, Inc. (NYSE: FAX)

• Aberdeen Latin America Equity Fund, Inc. (NYSE: IAF)

• Primarily managed from Singapore

• Primary managed from London and Sao Paulo

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Closed-end funds, unlike open-end funds are not continuously offered. There is a one-time public offering, and once issued, shares of closed-end funds frequently trade at a discount from the net asset value. The price of the Fund’s shares is determined by a number of factors, several of which are beyond the control of the Fund. Therefore, the Fund cannot predict whether its shares will trade at, below or above net asset value.

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