Diversifying your emerging-markets allocation

Overview

  • Investors remain under-allocated to emerging markets despite growth of region
  • Suboptimal allocations to EM equity and debt can lead to missed long-term portfolio opportunities
  • EM sub-asset classes have distinct profiles that can offer enhanced diversification
  • Frontier markets have low correlations to other asset classes

Global investing has changed

Over the past few decades, the negative correlation between equities and bonds, as well as low valuations (that have expanded) and high yields (that have declined), has led to strong returns for investors in most balanced portfolios, such as the traditional “60/40” approaches consisting of 60% domestic equity and 40% domestic bonds. However, these outcomes are likely to change going forward. High valuations across asset classes today, as well as the likelihood of increasing yields and rising inflation over the coming years, will challenge investors’ ability to experience the same level of risk-adjusted returns. To help achieve their objectives, investors should consider opportunities to better diversify their portfolios. Many of these can be found within emerging markets (EM).

Revisiting EM

Among U.S.-domiciled portfolios, EM equity strategy assets under management made up about 5% of all equity strategy assets under management at the end of 2017, according to eVestment.1 This represents a significant underweight to the asset class based on market capitalization. For example, EM stocks comprise nearly 12% of the MSCI AC World Investable Market Index (IMI).2 Further, U.S.-domiciled EM debt (EMD) strategy assets comprise almost 2.5% of all fixed income strategy assets, according to eVestment; in comparison, EMD makes up 6.5% of the global debt market.3

Figure 1: U.S.-domiciled allocations to EM

Sources: Aberdeen Standard Investments, eVestment, JP Morgan, Bloomberg, MSCI, April 2018.

Why the under-allocation? The higher historical volatility associated with the asset class is a common explanation. Home country or region bias also helps explain why investors have not carried a meaningful allocation to emerging markets, as many have traditionally favored assets within their own familiar locale, shying away from less familiar markets associated with greater risks.

While investors in emerging markets face additional risks compared to those present in advanced economies, significant economic development and strengthening of financial markets in the developing world over the past couple decades have eased some perceptions of risks in emerging markets. Several decades ago, developed markets and emerging markets were notably different. Developed markets had stable governments, conservative monetary policies and lower levels of debt. In contrast, emerging markets previously faced unpredictable politics, unorthodox central bank policies and seemingly unsustainable levels of borrowing.

Emerging countries have since evolved. Populations are growing. A rising middle class should continue to support consumerism and economic growth as disposable income increases. In recent years, political progress has resulted in a number of pro-business and pro-reform governments. Many emerging nations have also set or are setting policies that are helping stabilize debt levels. Corporate governance has improved, and governments are ready and willing to spend on infrastructure.

As a result, emerging markets have become an important driver of global growth. In fact, against a growth outlook that many would describe as “lower for longer,” the incremental growth expected from developing economies relative to advanced economies over the coming years is material. Emerging economies are expected to grow about 5% each year for the next few years from 2018 through to 2022, in terms of annual percentage change of real (GDP), according to data from the International Monetary Fund (IMF). In comparison, growth in advanced economies is forecasted to be 2% in 2018, then slowing to 1.7% from 2020-2022.4 Data from the World Bank tells a similar story, as shown in Figure 2 below.

Figure 2: Growth in emerging market and developing economies expected to outpace advanced countries

Source: World Bank, January 2018. Notes: EMDEs = emerging market and developing economies. Shaded area indicates forecasts. Aggregate growth rates calculated using constant 2010 U.S. dollar GDP weights. Data for 2017 are estimates. Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed and actual events or results may differ materially.

Investors should consider long-term opportunities to capture this growth, and ensure that emerging markets are represented as a meaningful, core allocation in their portfolios today. When considering investments in EM equities or debt, it is critical for investors to understand the nuances of these asset classes.

Home country or region bias also helps explain why investors have not carried a meaningful allocation to emerging markets…

Emerging-markets equities

In June 1994, the MSCI Emerging Markets IMI was comprised of 12 countries and nearly 1,500 companies, and it represented less than 5% of the world’s market capitalization (cap), as measured against the MSCI AC World IMI. Nearly 25 years later, this broad EM equity index is now comprised of 24 countries and over 2,600 companies, and it represents almost 12% of the world’s market cap.5 Today, the emerging-markets equity investable universe is characterized by a diverse group of countries, sectors and economies. As younger populations support an expanding middle class, this equity universe could further expand.

A growing and expanding set of companies across sectors is supportive of the emerging markets equity asset class, as the increased diversification lowers the risk of sector concentration. Emerging economies were once driven by commodity exports. Today, many of them are shifting towards service-based economies. Companies in the health care, information technology (IT) and consumer sectors are now just as pertinent, if not more, than state-owned commodity companies and brands. This has helped widen the investment universe of EM companies.

EM stocks have historically demonstrated higher volatility and deeper drawdowns than developed-market stocks, reflecting the incremental risks of the asset class. Yet, a meaningful allocation to EM equities has historically helped improve overall risk-adjusted equity portfolio returns. Over the past 30 years, the combination of allocations to the MSCI Emerging Markets Index and the MSCI World Index that would have maximized annualized return per unit of annualized volatility would have been about 30% emerging markets and 70% developed markets, as shown in Figure 3.6

Figure 3: EM equities allocation can improve portfolio efficiency

Source: Aberdeen Standard Investments, MSCI. Period: January 1988-December 2017. For illustrative purposes only. Developed-markets (DM) equity represented by the MSCI World Index. EM equity represented by the MSCI Emerging Markets Index. Line refers to Return vs. Volatility.

In practice, a 30% allocation to emerging markets is unrealistically high for many portfolios due to liquidity concerns, particularly for larger asset pools. However, history suggests that introducing a meaningful allocation to emerging markets within an equity program would have produced a higher returning, more efficient portfolio.

The expansion of the emerging markets investment opportunity set over time has not been confined to larger cap companies. Since the launch of the MSCI Emerging Markets Small Cap Index in June 1994, the number of small-cap constituents has more than doubled to over 1,800 companies today.2 Similar to other markets, smaller cap companies within emerging markets offer investors an opportunity to gain greater exposure to local economic demand growth than can be found with larger-cap companies.

As illustrated in Figure 4, whereby the larger cap MSCI Emerging Markets Index carries greater weight to global demand sectors such as IT and energy, as well as government-backed market segments such as financials, the MSCI Emerging Market Small Cap Index has larger weights to consumer-related segments, such as consumer discretionary and healthcare. Blue is MSCI Emerging Markets Small Cap Index. Orange is MSCI Emerging Markets Index.

Figure 4: EM equity sector composition

Source: MSCI, as of February 28, 2018. For illustrative purposes only.

Greater exposure to domestic economic activity positions smaller-cap EM companies to be less sensitive to the cyclicality of developed-market economies than larger-cap EM firms, the latter of which tend to generate a greater portion of revenue abroad. As a result, smaller-cap stocks have proven to be less correlated to developed-market stocks, as shown in Figure 5.

While this has resulted in smaller-cap EM stocks lagging larger-cap EM stocks in certain robust market environments such as 2017, its lower beta has allowed smaller-cap stocks to hold up better in certain periods where larger-cap EM stocks have struggled, such as during the 2013-2015 period.

Figure 5: EM equities – Risk statistics

EM equities – Risk statistics

Source: Aberdeen Standard Investments, MSCI. Period: June 1, 1994-December 31, 2017. USD returns. For illustrative purposes only.

While investors in EM equities should understand and appreciate the risks of the asset class, the potential diversification benefits of investing in compelling companies located in some of the strongest growing economies in the world warrants considering whether EM stocks are appropriately represented within investors’ equity portfolios.

Emerging-markets debt

Emerging-markets debt (EMD) also provides a number of diversification benefits for investors, as the asset class has historically displayed a low correlation to developed-market debt. For example, over the last 10 years the correlation between hard currency sovereign EMD and U.S. Treasuries has been as low as 0.20, falling even lower to 0.12 over a 20-year period. We believe that this low correlation stems from two main factors. First, when looking from a top-down perspective, EMD is usually influenced by factors that are different from those impacting developed-market bonds, as explained below. Second, when looking from a bottom-up perspective, adding EMD to a fixed-income portfolio can help increase issuer diversity and offer a larger opportunity set for issuer selection.

EMD can be broadly classified in three sub-asset classes:

  • Hard currency
  • Local currency
  • Corporate bonds

Each type has different return drivers, and the market factor with the greatest influence varies among the three segments. Such complexity provides the potential for distinct diversification benefits (see Figure 6).

Figure 6: Types of EMD assets

Types of EMD assets

Source: Aberdeen Standard Investments, 2018.

Hard currency EMD

In hard currency EMD, where bonds are issued in U.S. dollars, the yield of a bond is typically the U.S Treasury yield for this maturity plus a spread to compensate for the additional risk of investing in EMD. While a U.S. Treasury portfolio will be driven primarily by U.S. dollar interest-rate exposure, the performance of a portfolio of hard currency EMD is driven by a combination of both interest-rate movements and spread movements. More often than not, spreads over U.S. Treasuries have fallen as U.S. Treasury yields increased (and vice versa). This is because rising interest-rate levels have typically accompanied higher growth levels. Hard currency EMD can thus offer diversification relative to U.S. Treasuries as spreads are likely to tighten on improved global growth prospects.

Local currency EMD

Like their hard currency counterparts, local currency EMD can also provide long-term diversification benefits, which tend to come primarily from their exposure to local EM currencies. Therefore, adding EM unhedged local currencies exposure to a dollar-based asset mix can improve risk-adjusted performance. While a U.S. Treasury portfolio will be 100% exposed to U.S. interest rates and U.S. dollar risks, adding a local currency exposure helps enhance portfolio diversification by broadening exposure to an additional 18 yield curves and currencies.

Currently, EM currencies are showing signs of strength and can help investors diversify away from currencies in the developed world that are less attractively priced. While the correction in EM currencies over the past five years is similar to the correction that occurred during the Asia crisis, the difference is that since the Asian crisis, EM currencies have now shifted from a fixed to a floating exchange rate, which helped the currencies better withstand financial adjustments. Today, EM currencies remain relatively cheap when compared to the U.S. dollar (USD) on a long-term basis.

EM bonds have historically offered higher long-term yields over those of developed-market bonds; this yield cushion can help mitigate the impact of periods of EM currency weakness. Conversely, periods of sustained U.S.-dollar weakness can provide short-term support to EM currencies and local currency EMD.

EM corporate bonds

Among its many attractive characteristics - including a low default rate and a large universe of potential opportunities - EM corporate bonds offer significant diversification benefits to a global fixed-income investor. Unlike U.S. high-yield issuers, emerging-markets companies are located in multiple regions all over the world. As such, they operate in varying political, regulatory and corporate environments. This results in much more diversity among the drivers of return for EM corporate bonds. By contrast, the U.S. high-yield bond market is predominately impacted by developments in the U.S. economy.

EM corporates is a mainstream asset class that is about 20% larger than U.S. high yield, consisting of approximately 800 issuers, which means investors have a larger opportunity set to choose from.7

Figure 7: Relative size of markets ($bn): EM corporates at close to $2 trillion

Relative size of markets ($bn): EM corporates at close to $2 trillion

Source: JP Morgan, September 30, 2017. HY (high yield). HC (hard currency). ABS (asset-backed securities). CMBS (commercial mortgage-backed securities). For illustrative purposes only.

The average credit metrics of EM corporates tend to be stronger than those of developed markets. For example, leverage among EM companies is often lower than that of U.S. companies (see Figure 8).

Figure 8: Net leverage (x) between EM and U.S. companies

Net leverage (x) between EM and U.S. companies

Source: Bank of America Merrill Lynch, June 30, 2017. For illustrative purposes only

EM corporates can act as a defensive allocation within a portfolio. During the period from 2000 to 2015, there were only two years where the EM corporate bond market (as measured by the JP Morgan CEMBI Broad Diversified Index) posted negative returns. During one of these instances, known as the 2013 “taper tantrum,” the EM corporate bond market declined 0.60% in terms of total return. In comparison, the Bloomberg Barclays U.S. Aggregate Bond Index fell 1.53% and the JP Morgan EMBI Global Diversified Index (representing hard currency sovereign EMD) fell 5.25%. By diversifying within sub-asset classes of EMD such as EM corporates, investors can help mitigate losses during times of severe market stress.

Figure 9: EM Corporate Index: Only two times of negative returns between 2000-2015

 EM Corporate Index: Only two times of negative returns between 2000-2015

Source: Bloomberg, JP Morgan, Barclays, December 31, 2013. For illustrative purposes only. Past performance is not an indication of future results. Indices: EM Corporate=JP Morgan CEMBI Broad Diversified Index, US Aggregate=Bloomberg Barclays U.S. Aggregate Bond Index, EM HC Sovereign=JP Morgan EMBI Global Diversified.

Improving a portfolio’s efficient frontier with EMD

While investors can benefit from diversifying with EMD from a larger opportunity set and the risk mitigation strategies that can be achieved through the diversity of each sub-asset class’ distinct characteristics, EMD can also provide benefits to a portfolio via an improved efficient frontier, as illustrated in Figures 10 and 11.

Figure 10: Improving your efficient frontier through an EMD allocation

Source: Aberdeen Standard Investments, December 31, 2017. For illustrative purposes only.

Here we show how investors can enhance their efficient frontier using EMD assets. The U.S. Treasuries benchmark has been used because to our knowledge, there is no existing aggregate benchmark that represents a combination of risk-free rates across emerging markets. (The U.S. Treasuries benchmark is often used as the proxy risk-free rate in most efficient frontiers.)

Figure 11: Issuer diversification through emerging-market debt

 Issuer diversification through emerging-market debt

Source: Aberdeen Standard Investments, December 31, 2017. Past performance is not an indication of future results. For illustrative purposes only.

Risks continue to evolve

Default risk is less of a concern for EMD now than it has been in the past. While higher default and lower recovery rates are often suggested as reasons why EMD issues trade at a premium to developed-market bonds with a similar credit rating, recent history suggests otherwise. Default events in EMD occur less often, and while they still happen, EM sovereign bonds have typically displayed very high recovery rates in most cases. Default rates for EM sovereigns have been relatively stable at just below 4% for five-year cumulative default rates, and the vast majority of those EM defaults can be linked to idiosyncratic stories where the issuer's rating had been gradually declining for several months. In contrast, global high-yield bonds have a five-year issuer-weighted cumulative default rate of 19.8% over the same time period (1983-2016).8 Within EM corporates, long-term default rates are actually lower than those in developed markets, despite the perceived higher risk of EM assets, as shown in Figure 12.

Figure 12: Lower historical default rates in EM Corporates vs U.S. Corporates

Lower historical default rates in EM Corporates vs U.S. Corporates

Source: JP Morgan, November 30, 2017. For illustrative purposes only.

Additionally, contagion across EMD due to a default has become less of an issue this decade as evidenced by the limited impact of the Argentinian default (2014) and Ukrainian default (2015) on the overall EMD market. While Moody's mentions that Greece's two defaults in 2012 (29% and 40% recovery rates) and Cyprus' default in 2013 (53%) were among the lowest recovery rates recorded for sovereigns, some of the highest recovery rates recorded were among EM sovereign issuers such as the Dominican Republic in 2005 (95%), Argentina in 2014 (100%) and Ukraine in 2015 (80%).

Although EMD is often associated with credit and political risk, its low correlation to developed-markets bonds make these investments more immune to interest-rate risk and provide a useful diversification tool amid interest-rate uncertainty in the developed world.

However, investors should also be aware of how a rising rate environment will affect EMD. Rising interest rates and a stronger U.S. dollar could generate substantial risk to EMD because of multiple effects. For one, if the U.S. Federal Reserve (Fed) continues to raise interest rates, it could subsequently increase the demand for U.S. sovereign debt. Developed-market debt is less likely to default than that of emerging markets.

In addition, rising interest rates may reduce the amount available for EM issuers to borrow. Any debt that EM countries owe to the U.S. would then have to be paid back at higher rates. The end result would be reduced external interest in EMD because the interest-rate spreads between EMD and U.S. Treasuries may no longer look as attractive.

The Center for Global Development noted that emerging markets are likely already aware of this and should be able to prevent monetary shocks by setting policy foundations that prevent outsized market disturbance. For investors who are interested in updating their allocation to EMD, they may consider a diversified approach.

Allocating within EMD

A diversified approach to EMD can include investments in particular segments of EMD or a blended approach. A blended approach includes allocations to local currency, hard currency and corporates to aid investors in diversifying across a range of countries, instruments and currencies. Because this specialized asset class has a broad range of diverse opportunities, in-depth research should be conducted before investments are made. An active approach can be useful in identifying opportunities that might otherwise be overlooked.

Risk factor considerations when analyzing risk/return profiles

  • High yielding issuers/sensitivity to commodity prices
  • Duration
  • Correlation/beta exposures
  • Volatility
  • Tracking error

For instance, in a comparison of relative value based on four different foreign currency bonds, some may look more attractive than others based on the risk-adjusted return outcome.

Figure 13: Return versus downside among four foreign bonds

 Return versus downside among four foreign bonds

Source: Aberdeen Standard Investments, September 2017.

Indonesian rupiah bonds offer returns that compensate for their risk exposure. Georgian U.S. dollar bonds provide solid returns for relatively low risk. In comparison, Colombian Peso FX bonds have lower returns that do not necessarily compensate for its twin deficits and dependency on oil revenues. The Malaysian 1MDB quasi sovereign U.S. dollar bonds do not seem to provide enough return for its higher exposure to political risk.

This is illustrative of how active strategies can help identify attractive risk-adjusted opportunities within the EMD category and help investors diversify across a range of sub-assets.

Diversifying into frontier markets

Portfolios can potentially be strengthened by investing in assets from developing countries with less advanced capital markets, otherwise known as frontier markets. Frontier markets are relatively small, illiquid markets in countries that are at an earlier stage of economic and political development than their more mature emerging market counterparts. While these economies may appear unsophisticated, they boast thriving enterprise and a high level of entrepreneurship.

Many of these countries have transformed themselves over the past two decades, with great progress achieved on literacy, access to credit, communications (via mobile phones), and public sector accountability. The proliferation of modern technology and communications has helped to lower the cost of and increase the speed of the development of various industries and services. Finally, government policy is increasingly orthodox and private-sector friendly, which helps support businesses. These advances have elevated the sustainable growth rate of many of these markets, and helped reduce systematic risks.

Like emerging countries, frontier markets got their start in commodities. However, frontier markets have also evolved. Improved country fundamentals have provided market access to many frontier countries, and today, much of frontier markets growth is supported by the demographic dividend.9 Frontier markets are buoyed by a young population and future workforce, with a high ratio of working or soon-to-be working population relative to a current or projected retirement population.

When factoring in the large number of markets not included in indices such as MSCI, frontier economies (in their broadest definition) comprise more than 100 countries, accounting for some 30% of the world’s population and around 10% of global GDP.10 The individualistic and domestic drivers of frontier markets mean that each individual country is less likely to be influenced by another within the asset class. Frontier markets have low levels of foreign ownership, and thus are less impacted by their more developed counterparts. Lower correlations to developed and emerging markets can provide additional diversification for investors, particularly during periods of heightened global market volatility.

As shown in Figure 14 below, frontier currencies have a low correlation to their peers.

Figure 14: Frontier currencies offer low correlation to peers (based on 5-year historical data)

Frontier currencies offer low correlation to peers (based on 5-year historical data)

Source: Aberdeen Asset Management (Quantum), August 7, 2017.

Frontier markets comprise a sizeable portion of the world’s land mass and population, not to mention many of the world’s fastest-growing nations – yet their nascent level of development and limited capital market depth result in barely any representation in most portfolios. Over the coming decades, we think that this will change, and there may be strong returns to be tapped.

Frontier-markets equities

Similar to the MSCI Emerging Markets Index at its genesis in 1988, the MSCI Frontier Markets Index represents less than 1% of total stock market capitalization today. This index contains more than 110 constituents from 23 different countries, including Argentina, Kuwait, Vietnam and Morocco. Yet, there is more to the opportunity set than the index alone. As mentioned previously, we believe that the frontier markets investable universe includes more than 100 countries. There are no guarantees frontier markets will emulate what emerging markets have achieved, but if economic power continues to shift further away from the developed world, it’s likely that wealth and economic activity will become more evenly distributed around the globe.

Investing in frontier-markets equities offers the potential for further diversification benefits for those who already invest in developed and emerging markets equities. As shown in Figure 15, correlations for frontier markets relative to developed markets have generally been lower relative to their EM peers. In fact, frontier markets stocks have exhibited relatively low beta with emerging- and developed-market stocks historically.

Figure 15: Frontier-markets equities – Risk statistics

Frontier-markets equities – Risk statistics

Source: Aberdeen Standard Investments, MSCI. Period: June 1, 1994-December 31, 2017. USD returns. For illustrative purposes only.

The current market and economic environment is supportive of the asset class. Frontier Asia has exhibited strong growth, and countries like Kenya and Egypt in Frontier Africa have begun an economic recovery. Commodity and currency pressures, as well as an overflow of negative sentiment from EM, have resulted in attractive current valuations, both relative to the asset class’s own history and in comparison to more mainstream equity markets.

Frontier markets have their own set of unique risks that investors should be aware of. Liquidity can vary greatly and markets lack scale and depth when compared with more mature counterparts. New democracies (and the accountability and transparency they bring) can be fragile. Governance and judiciary structures are often untested, and corruption is common. Meanwhile, most frontier markets suffer from low domestic savings rates and are therefore dependent on foreign capital for investment, while others are overly dependent on agriculture and commodities. Because opportunities vary widely among companies, sectors and countries within frontier markets, investors are best served by being selective and making sure that extensive research is conducted before investing.

Frontier-markets debt

Frontier countries are often associated with higher risks because of their checkered past. Political regimes have historically overstayed their welcome, leaving behind a broken economy with unsustainable debt. But in reality, frontier markets have come a long way over the past decade, and today they represent attractive investment opportunities, both within EMD and as a standalone asset class.

Within today’s frontier markets, investors can select from an opportunity set of 35 to 40 countries that typically offer a higher yield than mainstream EM issuers. The majority of these countries have been able to tap the Eurobond market over the past decade, with the total market capitalization increasing from less than $10 billion to around $140 billion. Hard currency frontier corporates are about a quarter the size of the sovereign issuance, but the bulk of issuance is in local currency government bonds, which often have double-digit nominal yields. The total market capitalization of frontier bonds is around $700 billion, which is about half the size of the U.S. high-yield bond market and only 5% of the total EMD market.

Frontier bond default rates have been similar to U.S. high yield over the past decade, but they have been skewed by two large defaults in Ecuador and Argentina. If these two defaults are removed, there have been only two other sovereign bond defaults, Ivory Coast (2010-11) and Mozambique (2017 – present). Meanwhile, Frontier hard currency sovereign bonds have had annualized returns of around 10% during this period, so investors have clearly been compensated to take the so-called high risk. Volatility has been surprisingly low, comparing favorably to hard currency and much lower compared to local currency.

Figure 16: Frontier default rate remains muted

Source: JP Morgan, December 31, 2017. Note: default rates are dollar-weighted; HY (high yield). For illustrative purposes only.

One of the key benefits of investing in frontier bonds is that they have historically had a very low correlation to U.S. Treasuries and other traditional fixed-income markets, which offers an opportunity to increase portfolio diversification and hedge against interest rate risk. This can be particularly useful for diversification when events in the developed world are unpredictable or creating risk within a portfolio.

Figure 17: Frontier market sovereign bonds have low correlation to U.S. Treasuries

Frontier market sovereign bonds have low correlation to U.S. Treasuries

Source: JP Morgan, August 31, 2017.

Emerging markets: an important source of diversification

Investors with deep-set home bias and fears over investing in emerging markets may be missing out on a number of attractive opportunities that can act as a complement to existing portfolio holdings. If anything, emerging and frontier markets are becoming more important to the global economy and shouldn't be ignored. Besides providing diversification, these asset classes offer access to vibrant, growing economies within markets that typically are less affected by events occurring in the developed world.

As emerging and frontier markets have expanded, they have become more meaningful contributors to global growth. An increased allocation to emerging markets through the use of targeted sub-asset classes not only reflects this growing significance within the world markets, but can also add meaningful diversification to an overall portfolio. However, investors need to be selective; these opportunities aren’t homogeneous and require rigorous research and extensive knowledge of local governments, economies and markets. Actively-managed strategies can help sort through the clutter and identify attractive long-term opportunities in the emerging and frontier world.

Because emerging and frontier countries are poised for continued growth, investors may wish to re-examine their EM allocations. Ensuring that the right foundation is in place to capture the individual strengths and risk/return profiles of each sub-asset class can help deliver a more optimal portfolio that is well-diversified and better-positioned for the evolving global landscape in years to come.

1“Emerging Markets Report: Trends in Long only EM Strategies.” eVestment, August 24, 2017.

2Source: MSCI. As of December 31, 2017.

3The 6.5% calculation represents the sum of the outstanding market values of the following JP Morgan Emerging Markets Bond Indices: EMBI Global Diversified, GBI-EM Global Diversified, NEXGEM and CEMBI Broad Diversified, with the global debt market being represented as the total market value of the Bloomberg Barclays Multiverse Bond Index. Source: Aberdeen Standard Investments, JP Morgan, Bloomberg Barclays, as of February 2018.

4Source: IMF Datamapper, World Economic Outlook (October 2017).

5Source: MSCI. As of December 31, 2017

6Assumes monthly rebalances, does not factor in transactions costs. USD returns.

7JP Morgan, September 30, 2017.

8Moody's Default and Recovery Rates, 1983-2016.

9Demographic dividend refers to economic growth that is spurred on by declining mortality and fertility rates, leading to increased productivity of the working population.

10Source: “The Evolution of Frontier Markets,” Aberdeen Asset Management, March 2017.

11Source: MSCI. As of December 31, 2017

12Moody's Default and Recovery Rates, 1983-2016.


Important Information

PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS.

Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.

Fixed income securities are subject to certain risks including, but not limited to: interest rate (changes in interest rates may cause a decline in the market value of an investment), credit (changes in the financial condition of the issuer, borrower, counterparty, or underlying collateral), prepayment (debt issuers may repay or refinance their loans or obligations earlier than anticipated), and extension (principal repayments may not occur as quickly as anticipated, causing the expected maturity of a security to increase).

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