Eaton Vance bullish on EM debt

Eaton Vance is “bullish” on the investment prospects of local-currency emerging market (EM) debt as those regions become the drivers for the rebound in economic growth. 

The firm had EM FX as a clear “overweight” risk factor for the first time ever and was positive on EM local interest rates, EM sovereign credit and EM corporate credit. 

In a research paper, Michael Cirami, director of global income and Matthew Murphy Jr, senior institutional portfolio manager at Eaton Vance Management, said reasons for this bullish stance included dovish policies of G3 central banks, low yields in core bond markets, increased deficits in the US and attractive relative valuations. 

They stated five reasons they were bullish on EM debt: 

1. Emerging economies were driving the rebound in global economic growth: EM economies did not shut down to the degree that occurred in developed-market economies in the face of COVID-19 in 2020, and neither were they are shutting down as aggressively now; 
2. EM debt assets had lagged the rally in developed-market assets: Despite the positive growth differentials, EM debt assets lagged the recovery in a number of developed market assets in 2020;   
3. The macro environment was very favourable for EM debt: Further, they believed we were seeing one of the most favourable macro environment for EM debt in decades; 
4. Positives for EM debt assets are not priced in: The positives for EM debt – better growth in emerging market economies, relatively attractively priced EM debt assets and a very favourable macro environment in decades – were not priced in; and 
5. Capital markets were open to issuers: In the first half of 2020, there was a lot of fear about solvency as it relates to liquidity in different emerging markets. Investors wanted to know whether funding would be available to countries and credits, including in the corporate space.  

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Cirami said Eaton Vance’s EMD team saw attractive FX investment opportunities in Uruguay, Colombia, Mexico and Indonesia, and countries that are in the widely used local currency benchmark: JP Morgan Government Bond Index Emerging Markets (GBI EM) Global Diversified. 

“We also see some attractive opportunities outside of the benchmark – notably Egypt, Serbia, Ukraine and Uzbekistan,” Cirami said. 

“Within the benchmark, we are positive on duration in Indonesia, Uruguay, Russia, Thailand and Malaysia. Outside of the benchmark, we are also positive on duration in Serbia and Ukraine. 

“While highlighting specific opportunities, it is worth highlighting that, within EM debt, investors need to be careful and selective when approaching this highly differentiated asset class.  

“On the flip side to the investment opportunities we have mentioned, there is also the growing problem in some countries – Oman being one, South Africa being another – of budget deficits and debt build up. This is an important topic and one that is not going away anytime soon.”