Case for EM bonds remains strong, Eaton Vance says
While investor sentiment on emerging markets has turned negative in recent weeks due to concerns over tariffs, trade, global growth and a resurgent US dollar, the long-term case for emerging markets in bond portfolios is still strong, according to investment manager Eaton Vance.
Kathleen Gaffney, director of diversified fixed income at Eaton Vance, said it's a mistake for bond investors to give up on emerging markets (EM) in their portfolio due to recent price weakness driven by trade fears and a rising US dollar.
“EM can play an important role for long-term investors who can find opportunities in individual regions, countries, sectors and companies,” she said.
Gaffney said one of the manager’s major themes is investing away from the US, both in terms of the dollar, rate risk and fundamentals.
“It's important to remember that developed and emerging markets are at different stages in their cycles. For example, in the US, we have low but rising inflation as the Federal Reserve unwinds its balance sheet and gradually hikes rates. US GDP growth has been slow and steady, averaging around 2 per cent the past few years,” she says.
“In EM, the picture is quite different. Many individual countries are growing fast, and most central banks are not hiking rates. In fact, those that have been hiking have broadly been defending their currencies.
“Also, much of the economic growth in EM is organic, rather than being based on mergers, acquisitions and financial engineering.”
Gaffney said EM currently offers high but generally falling inflation, which provides opportunities away from the US into a more global positioning, the prospect of investing in higher real rates and an inflation hedge.
“Anti-globalization is in the headlines, but individual countries offer the opportunity for positive momentum as they find their own way in this new global environment,” she said.
“In EM, we certainly have political risk, but that offers opportunity for improvement. The impact of politics in selection may serve as an opportunity for differentiation and return, especially as developed central banks remove liquidity.”
Gaffney said credit quality is higher in EM from a broad balance sheet standpoint, with generally lower leverage.
“Also, as more investors become comfortable with the sector, EM companies can benefit from greater access to capital. And as EM companies tap the markets for financing, they have made improvements in transparency and disclosure. These are all signs of economies and markets maturing.”
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