Industry Voice: Macro environment, yields, valuations all positive for EM debt local currency

The team running EM debt portfolios at Eaton Vance has taken a unusually bullish stance on the asset class. Across all risk factors – EM FX, EM local rates, EM sovereign credit and EM corporate debt – the team has constructive views. A key reason here is the supportive macro environment for the asset class and the belief that this supportive environment will continue. On a one-year view, EM local-currency-denominated debt is the team’s top pick.

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Industry Voice: Macro environment, yields, valuations all positive for EM debt local currency

Eaton Vance is currently upbeat about the investment prospects for local-currency-denominated emerging market debt (EMD). 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.¹

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, we look in more detail at the reasons for this upbeat outlook, particularly in relation to local-currency debt.

1. 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. While significant growth downgrades for 2020 due to COVID-19 have continued - with several countries, including Zambia and Suriname, being added to the list of defaulting countries in the fourth quarter of 2020 - there was some improvement in the growth outlook for a handful of EM countries between April and October 2020. Relative to the outlook for developed economies, the International Monetary Fund (IMF) projects a stronger rebound in emerging economies in 2021.

2. Emerging-market debt assets have lagged the rally in developed-market assets

Despite the positive growth differentials, emerging market debt (EMD) assets lagged the recovery in a number of developed-market assets in 2020. This lag was most evident in the EM currency markets, where many of the worst hit currencies in March and April 2020 were still in negative territory at the end of 2020. In aggregate, EM currencies finished the year down 7.35% overall.

 

Read the paper

 

¹Source: Eaton Vance. AUM data for the EMD team is as at December 31, 2020. Views correct as at January 24, 2021.

 

Risks and important information: In emerging-market countries, the risks may be more significant in regard to sensitivity to stock market volatility, adverse market, economic, political, regulatory, geopolitical and other conditions. Important Additional Information and Disclosures Sources of data: Eaton Vance. In the EU this material is issued by Eaton Vance Global Advisors Ltd ("EVGA") which is registered in the Republic of Ireland with Registered Office at 70 Sir John Rogerson's Quay, Dublin 2, Ireland. EVGA is regulated by the Central Bank of Ireland with Company Number: 224763. Outside of the EU and US, this material is issued by Eaton Vance Management (International) Limited ("EVMI") 125 Old Broad Street, London, EC2N 1AR, UK, and is which is authorised and regulated in the United Kingdom by the Financial Conduct Authority.

Investing entails risks and there can be no assurance that Eaton Vance, or its affiliates, will achieve profits or avoid incurring losses. It is not possible to invest directly in an index. Past performance is not a reliable indicator of future results.

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