EM debt opportunities remain for 2020 in wake of 2019 rally

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

The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Eaton Vance disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Eaton Vance are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Eaton Vance strategy. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness.

  • All Posts
  • More
      The article below is presented as a single post. Click here to view all posts.

      By Emerging Markets Debt TeamEaton Vance Management

      Boston - The 2019 emerging-markets (EM) debt rally rebounded to finish on a strong note in the fourth quarter, as local-currency EM debt, external (dollar-denominated) debt and corporate credit all generated positive returns (see chart below). All three EM sectors had double-digit returns for 2019.

      Local-currency EM debt, as measured by the J.P. Morgan Government Bond Index-Emerging Markets (GBI-EM) Global Diversified, advanced 5.20% in the fourth quarter, mostly on the strength of foreign exchange (FX) and carry. For the year, the GBI-EM returned 13.47%.

      Sovereign credit, represented by the J.P. Morgan Emerging Market Bond Index (EMBI) Global Diversified, gained 1.81%. Tightening sovereign credit spreads added 3.04% to return, but this was partially offset by the 1.30% negative contribution of rising US Treasury rates. In 2019, the EMBI returned 15.04%.

      Corporate credit, represented by J.P. Morgan Corporate Emerging Markets Bond Index (CEMBI) Broad Diversified, gained 2.21%, largely from the tightening of sovereign spreads. Tightening corporate spreads added modestly as well, but this was mostly offset by the negative US Treasury component. For the year, the CEMBI had a total return of 13.09%.

      Index performance recap for Q4 2019Blog image EMD 1.9.20

      Sources: J.P. Morgan, Eaton Vance as of 12/31/19. The vertical axis reflects the amount contributed by each factor to total return - adding the bars above 0% and below 0% (negative numbers) results in the total return in the headline. FX is the gain or loss in the GBI-EM from currency changes relative to the US dollar. EURUSD reflects the portion of currency movement in the GBI-EM that is explained by the change of the euro versus the US dollar. Rates refers to the contribution of change in local-currency interest rates in the GBI-EM. Carry refers to the risk-free returns in each GBI-EM country that cannot be attributed to FX, EURUSD or rates. Sovereign credit spread refers to the spread above US Treasurys in the EMBI paid by a country. Corporate credit spread is the spread above the sovereign spread paid by an EM corporate issuer. US Treasury refers to the contribution to return in the EMBI and CEMBI (both dollar-denominated indexes) due to interest-rate changes on the US Treasury.

      Looking ahead

      It's fair to say that EM debt performance "fired on all cylinders" in 2019, with strong contributions from US Treasury rates, EM rates, FX, and sovereign and corporate spreads. Fundamentals generally continued to improve in EM countries.

      Despite the very strong performance in 2019, we remain very constructive on the EM asset class, based on dovishness from the US Federal Reserve and the European Central Bank (ECB), continued improvement country fundamentals and fund flows.

      It is, however, important for investors to avoid EM trouble spots, and the list of distressed sovereign names is growing. Our cautionary list includes Lebanon, Argentina, Zambia, Ecuador and Oman.

      From a macro perspective, we anticipate that risk levels will modestly decline. For example, we expect US-China trade talks to be on the more constructive side, as the Trump administration turns its attention to the 2020 presidential race. While tensions in the Middle East remain elevated, there are signs the Sunni coalition is fracturing.

      In 2020, China will be added to J.P. Morgan's widely tracked GBI-EM, which follows moves by the country to ease restrictions on foreign investors in its local bond markets. This is a significant move, given that China is the world's second-largest economy and the third-largest bond market. The market is also speculating that Serbia, Ukraine and Egypt (three countries we have been bullish on) will be considered for benchmark inclusion.

      Bottom line: In the wake of the 2019 EM debt rally, we still see significant opportunities in the asset class, with country fundamentals continuing to drive performance, as they did in the latter half of 2019. We believe that careful fundamental analysis, drawing broadly on opportunities that extend beyond benchmark countries, will be especially important for investor success in 2020.