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The Island of "Misfit Investments"

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.

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      By Michael A. Cirami, CFACo-Director of Global Income, Eaton Vance Management

      Boston - In this reprise of our 2018 holiday blog, we share the philosophy that drives the global search for value for our clients.

      The holiday season is often a joyous time filled with family, friends and traditions. A long-standing tradition in my family is watching the 1964 classic TV special, "Rudolph the Red-Nosed Reindeer." My favorite scene is when Rudolph lands on the Island of Misfit Toys and encounters King Moonracer. As Rudolph learns: "Every night King Moonracer searches the entire earth, and when he finds a misfit toy — one that no little girl or boy loves — he brings it here to live on his island, till someone wants it." While something is wrong with each of the toys, there is also something precious.

      The holiday season is also a time of reflection. I often think that the Eaton Vance Global Income team and King Moonracer share a common philosophy. Every day we search the entire earth looking for unloved investment opportunities — the "misfits" that most investors shun. But just as King Moonracer strives to find something precious in cast-off toys, our team works hard to look past damaged reputations to find investment opportunities that we believe offer excessive risk premiums.

      Frequently, these unloved investments have their roots in negative historical perceptions that have little or no relevance today. Emerging-markets countries are especially susceptible to such outmoded and/or unfounded views. Here are three "misfit investments" we have considered recently:

      Ukraine

      Perception: A country that failed to enact meaningful reforms after the collapse of the Soviet Union. As a result, over the past few decades the country suffered from high levels of corruption, inflation and violence.

      Reality: For the past decade, the people of Ukraine have been demanding closer integration with the West. This year's election of political outsider President Volodymyr Zelensky brought hope for much-needed structural reforms in the macro economy and political landscape. Zelensky's campaign promised to combat corruption, improve living standards and peacefully end the conflict with separatists in eastern Ukraine. Since the election, spreads have substantially tightened and inflation has decreased significantly, reaching 5.1% on November 30. Zelensky's absolute majority in Parliament and an impressive legislative agenda have set the stage for impressive reforms in 2020 and beyond.

      Angola

      Perception: Angola is an oil-dependent country riddled in corruption and hampered by a terrible business environment.

      Reality: While Angola is still very much dependent on oil for foreign exchange, government revenue and growth, the country has embarked on an ambitious reform program to turn around the fledgling economy and open Angola to new investment. Since coming into power at the end of 2017, President Lourenco has removed numerous corrupt government officials, secured a $3.7 billion IMF program, launched an extensive privatization program, and allowed the country's currency, the kwanza, to float. When Angola came to the market in November, its $3 billion eurobond issuance was 2.8x oversubscribed, signaling investors' interest in the new Angola.

      Pakistan

      Perception: A country constantly battling terrorism and a frequent IMF program recipient (13 since the 1980s) that cannot find its own footing. It is also a poster child for China's so-called debt-trap diplomacy given the $40 billion China-Pakistan Economic Corridor Project.

      Reality: Pakistan has been making difficult decisions to tackle deep-rooted economic problems. The 25% currency depreciation and efforts to raise tax revenue have made good progress in addressing the country's current account and fiscal deficits. Beyond stabilization, the government's push for higher savings, exports and industrialization may help the economy find solid footing going forward.

      Bottom line: My colleagues on the Global Income team and I wish you happy holidays and the best for the new year.