EM debt enters new phase
After strong rebound in Q2, the market has entered a new phase and investors will see greater differentiation in performance across the emerging market debt (EMD) investment universe, according to Eaton Vance.
Following this, investors should focus on three key areas which included:
1.The critical role of country-level analysis;
2. Investment flexibility, geographically and in terms of risk factors; and
3. Balancing short-, medium- and long-term factors.
Bradford Godfrey, institutional portfolio manager and director of alternative & asset allocation strategies at Eaton Vance, said that exploiting the full breadth of the EMD investment universe on a country and risk-factor basis, according to him, would remain a critical factor for investment success while investible risk factors would continue to include currencies, local interest rates and sovereign and corporate spreads.
“We believe the market has entered a new phase following the broad-based recovery in the second quarter that will see greater differentiation in performance across the EM debt investment universe,” he said.
“In our view, a focus on country analysis, investment flexibility and the ability to appropriately weigh shorter and longer-term factors will be critical for investment success in EM debt ahead.
“While we see attractive relative value at the sector level in EM credit, we believe that selective opportunities remain in rates and currencies away from many of the large benchmark constituents.”
According to Godfrey, Egypt was one country within the wider opportunity set which had good opportunity and expected positive growth in 2020, bucking the wider EM trend.
“Other countries we’d highlight include Romania, Uzbekistan and Uruguay.
“Although Romania faces an economic contraction, forecast at -5%, we believe relatively healthy debt metrics will help the country weather the current storm. Uzbekistan, for its part, is a country that’s not on many people’s radar. However, Uzbekistan’s growth forecast is positive, the budget deficit is manageable and its reform-minded leaders have been moving toward a more market-based system,” Godfrey noted.
Similarly, Uruguay’s government was also implementing reforms, even in the midst of the pandemic.
“While the growth outlook appears somewhat challenging, like other parts of the region, the country has taken steps to move forward a sustainable reform program,” the firm said
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