More issuers line up to tap strong EM debt market

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      By Emerging Markets Debt TeamEaton Vance Management

      Boston: The emerging-market (EM) debt sector in 2019 remains on a roll. Ongoing demand from investors has helped produce strong performance, reflected in year-to-date total returns through May 31 of 7.65% for sovereign debt, 6.49% for corporate and 3.04% for local currency.* EM debt gross issuance, in just sovereign and corporate hard currency issues, stands at $281 billion through May 31, compared with $521 billion for all of 2018, according to J.P. Morgan.

      With demand still strong, a number of EM countries are lining up for planned new issuance before the summer is in full swing, including Eastern European countries Serbia, Croatia, Lithuania and Ukraine, as well as Ecuador.

      EM is benefiting from several tail winds, including:

      • An improving macro backdrop. The U.S. Federal Reserve has moderated its tone and is now likely to be on hold this year. China has just announced a stronger-than-expected burst of fiscal stimulus as part of efforts to manage its growth slowdown. We also think the Trump administration, in the lead up to the 2020 elections, is likely to focus more on domestic issues, easing back on its hard-edged international stance that in 2018 included sanctions against Russia and intense political pressure on Turkey.

      • Country fundamentals. Issuers in the developing world are now showing slight improvements at the margin following a few years in which they have been stable or deteriorating overall.

      • Investor flows and interest in EM debt have been improving. As of May 31, more than $37 billion had come into the asset class, according to J.P. Morgan estimates.

      Bottom line: Renewed flare-ups in trade wars and/or slower global growth remain potential threats to EM debt performance. We believe that intensive country analysis, combined with a focus on currency, rates and credit valuation, is the best way to capitalize on exposure to EM debt and minimize its risks.