Real interest rates suggest value in EM debt
In the wake of first-quarter volatility, emerging market (EM) debt as offers a number of value opportunities, according to Eaton Vance.
The EM team at Eaton Vance said one of the key macro indicators of value in EM debt was the real interest-rate differential with developed-market debt — the spread between EM debt and developed markets, after adjusting for anticipated inflation in respective countries.
“In our view, the key to capitalising on EM debt opportunities in this environment will rely heavily on understanding the economic trends within each country and the forces driving real interest-rate differentials,” the firm said.
“Many EM countries have had more recent experience with elevated inflation levels. That contrasts with developed markets, where inflation is being driven — at least initially — by post-pandemic issues, like supply chain constraints and large price jumps compared with year-ago levels.
“There is a wide dispersion of inflation forecasts within EM countries, and some central banks are moving more aggressively to tighten policy. Russia, Brazil, Ukraine and Turkey are examples of where central banks have already hiked rates this year to help control inflation.
“The real interest-rate differential between developed and emerging markets suggests EM debt is now offering attractive value. But we believe capitalizing on those opportunities will require strong fundamental knowledge of each country's economics, and how relative inflation scenarios are likely to play out in the months and years ahead.”
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