EM strikes back

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      By Michael A. Cirami, CFA, Co-Director of Global Income, Eaton Vance Management and Eric Stein, CFA, Co-Director of Global Income, Eaton Vance Management

      Boston - Emerging-markets (EM) debt started the year with a bang, as a dovish U.S. Federal Reserve, attractive starting valuations and improving EM fundamentals delivered for the asset class. All three indexes were strongly positive for the first quarter (see chart below).

      • For local currency debt, foreign exchange, rates and carry more than offset the negative contribution of the EUR/USD exchange rate, for a total return of just under 3%, based on the J.P. Morgan GBI-EM Global Diversified Index.

      • Tightening sovereign credit spreads and falling U.S. Treasury rates were the biggest contributors to U.S. dollar-denominated sovereign debt, resulting in a total return of just under 7%, based on the J.P. Morgan EMBI Global Diversified Index.

      • Corporate U.S. dollar-denominated EM debt benefited equally from tightening sovereign credit spreads, tightening corporate spreads and falling U.S. Treasury rates, with a total return of over 5%, based on the J.P. Morgan CEMBI Broad Diversified Index.

      EM debt also gained from significant inflows, continuing a dramatic turnaround from last year. This was met by robust issuance, including inaugural eurobond issuance by Uzbekistan and Benin. The quarter ended with significant volatility as markets tried to reconcile the Fed's recently dovish stance with slowing global growth.

      Falling rates and tightening spreads powered an impressive quarter for EM debt.


      We expected the asset class to perform well in the first quarter, and we remain very constructive on the asset class, which is still supported by the Fed, improving country fundamentals and asset class flows.

      Through the beginning of the year we expected stimulus measures to help China's economic cycle bottom out in the first half of this year, and some recent data has been surprisingly positively. The expected economic growth turnaround in China further improves what is already a fairly attractive macro environment for EM debt.

      Bottom line: Following the quarter's sharp rally, we remain constructive on EM debt, yet still caution that investors considering EM debt rely on country-specific due diligence and careful evaluation of risk factors.