2020 Mid-Year Outlook: Emerging Market Debt

Timely insights from portfolio managers and industry experts on key financial, economic and political issues.

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      By Michael A. Cirami, CFADirector of Global Income, Eaton Vance Management

      Boston - Country selection and flexibility are critical to navigating the EM debt sector.

      The dramatic events that we saw in early 2020 have certainly impacted the emerging market debt space in a significant way. But the asset class has come back in a meaningful way from the lows that we saw in March and April and early May. But the market rally over the recent period is likely now over. We're entering a period of differentiation. So how one invests in the asset class is critically important.

      There's three things that we're thinking about. The first is that countries matter: How they deal with the virus and their economies is of critical importance. Policymakers are trying to maximize economic output while not overrunning their healthcare systems. And how countries are faring with this endeavor varies. Some are doing well, some are not doing so well. And unfortunately, for emerging market debt as an asset class, many of the bellwether countries are not handling this so well. So it's important that investors look for the broadest universe possible when accessing the asset class.

      The second thing that's on our mind is focusing on risk factors. There are a number of opportunities within the emerging market debt space. One could invest in foreign exchange, local interest rates and sovereign credit. And there's a fair amount of differentiation across these asset types. So in one country, sovereign credit might look attractive, and in another, it could be the foreign exchange markets and the local interest rates that investors should preference. So having that type of flexibility is key.

      The third thing worth saying is that the situation is quite fluid, so investors should be prepared to react as the situation unfolds on the ground in various countries around the world. So not being too wedded to an investment thesis that one hopes would play out over the medium or long term, one should be a bit more flexible. With that, I thank you for your time. I wish you the best of health and the best in the financial markets.