Wealth manager Eaton Vance is currently upbeat about the investment prospects for local-currency-denominated Emerging Market Debt (EMD) and has provided the following outlook.
The Eaton Vance EMD team, managing U.S.$8.4 billion in assets, has EM FX as a clear “overweight” risk factor for the first time ever. The team is simultaneously positive (“moderate overweight”) on EM local interest rates, EM sovereign credit and EM corporate credit.
Michael Cirami, director of Global Income and Matthew Murphy Jr., senior institutional portfolio manager at Eaton Vance Management, in a recent paper note: “Reasons for this bullish stance include dovish policies of G3 central banks, low yields in core bond markets, increasing deficits in the United States and attractive relative valuations.”
Below is a summary of the reasons Eaton Vance give for this upbeat outlook, particularly in relation to local-currency:
- Emerging economies are driving the rebound in global economic growth: Emerging-market economies did not shut down to the degree that occurred in developed-market economies in the face of COVID-19 in 2020, and neither are they are shutting down as aggressively now.
- Emerging-market debt assets have lagged the rally in developed-market assets: Despite the positive growth differentials (EMD) assets lagged the recovery in a number of developed-market assets in 2020.
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3. The macro environment is very favourable for EM debt: Further, we believe we are 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 EMD – better growth in emerging market economies, relatively attractively priced EM debt assets and a very favourable macro environment in decades – are, on the whole, not priced in.
5. Capital markets are 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. The good news is that over the second half of 2020 and continuing into January 2021, capital markets have been wide open to issuers.
Cirami added: “Eaton Vance’s EMD team sees attractive FX investment opportunities in Uruguay, Colombia, Mexico and Indonesia, countries that are in the widely used local currency benchmark: J.P. 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. 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 EMD, 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.”
