Eaton Vance Bullish on the New Emerging Market Debt Landscape

Emerging Market Debt

As the world heals from the lows in economic output and capital markets brought on by Covid-19, investors are assessing opportunities to take advantage of the recovery. Developed markets assets have recovered their losses and accelerated to new highs, as fiscal and monetary policy dramatically reduced the downside risks. These new highs extend to both equity and fixed income markets, with earnings multiples rising to all-time highs and credit spreads grinding to historic lows.


We believe, the attractiveness of emerging markets debt stands out for its remarkable value relative to both its prior history and developed-markets assets today. After languishing near their March 2020 lows, emerging markets debt rallied substantially near the end of last year, as markets celebrated positive vaccination news and the results of U.S. Elections. A rapid and disorderly rise in U.S. interest rates during February of 2021, swiftly brought asset prices back to their 2020 lows, as the emerging markets currencies weakened, local interest rates rose and credit spreads widened.


In contrast to the negative price actions, most emerging market economies are accelerating as the positive momentum from vaccination programs and ample liquidity from unprecedented stimulus washes onto the shores of Latin America, Emerging Asia, Africa, and developing Europe.Additionally, countries are utilizing favorable terms of their IMF programs to implement the necessary reforms to drive growth beyond the recovery. This trifecta of improving fundamentals, relative valuation, and the supportive macro environment leads to the most bullish outlook Eaton Vance’s Emerging Markets Team has held in over a decade.


While broad-based metrics of valuation support a bullish stance, we believe the key for emerging markets investing is country selection.Yet, the prevalent emerging markets debt benchmarks either exclude a sizable portion of the investment universe or combine all countries into one market-capitalization index. Further, these indexes usually capture developed-market risks such as U.S. Interest rate duration and the euro/dollar exchange rate risk that are beyond the analysis capabilities of managers dedicated solely to emerging markets. We believe that a bottom-up, high active share approach to emerging markets debt investing that focuses on country-level analysis can convert the structural weaknesses in the benchmarks into structural advantages. In so doing, we believe investors will be better placed to capture key benefits available in the asset class (better diversification, enhanced returns, and higher income), while also improving ESG outcomes.


Eaton Vance brings its decades of experience to bear through such an approach via our Emerging Market Debt Opportunities strategy, which, since inception over eight years ago, has delivered industry leading risk-adjusted returns. The strategy uses the full-spectrum of opportunities – countries and sectors – and delivers pure emerging markets debt risk by hedging out U.S. duration. Our approach prioritizes investing in countries where positive structural change is likely to occur and surgically taking exposures in the specific risk factors(currency, rates, or credit spreads) that we believe are most likely to benefit from a reduction in the country risk premium.

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