Industry Voice: The new COVID-19 landscape - country selection is key for EM debt

COVID-19 has changed the landscape for emerging markets (EM) debt, injecting a new dimension of pandemic-related economic uncertainty. In this report, the Eaton Vance EM debt team outlines our view that strong fundamental analysis and country selection is more important than ever.

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Industry Voice: The new COVID-19 landscape - country selection is key for EM debt

COVID-19 has changed the landscape for emerging markets (EM) debt, injecting a broad new dimension of pandemic-related economic uncertainty. The impact varies widely across EM countries - in many ways, the imperative to balance "lives vs. livelihoods" parallels the challenges faced by developed economies. But many EM countries with less diversified, less resilient economies also have unique problems that are exacerbated by the pandemic, especially among the poorest and most vulnerable populations. 

From an investment management perspective, today's environment underscores the key tenets the Eaton Vance EM debt team has developed over the past several decades. Most EM strategies are based on common indexes like the JP Morgan Emerging Market Bond Index (EMBI) for dollar-denominated, sovereign bonds, or the JP Morgan Government Bond Index - Emerging Markets (GBI-EM) for local-currency denominated debt.

There are several key reasons why benchmark-based approaches may be suboptimal. 

For one, benchmark valuations may be unattractive, from an asset price perspective, at any given time. Nevertheless, they are - by definition - required holdings for benchmark-based strategies. 

Further, indexes may be highly concentrated - for the GBI-EM, the top 10 countries account for 80% of its weight, as of September 30, 2020. This kind of concentration of a relative handful of larger EM issuers has been a major source of the index's historical volatility. The market impact of this concentration has grown along with the rise of index-based EM ETFs.

 

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Risks

This material is issued by EVMI and is for Professional Clients/Accredited Investors only.

An imbalance in supply and demand in the income market may result in valuation uncertainties and greater volatility, less liquidity, widening credit spreads and a lack of price transparency in the market. As interest rates rise, the value of certain income investments is likely to decline. These risks may be more significant in emerging markets due to increased risk of adverse market, economic, political, regulatory, geopolitical and other conditions. These risks are magnified for investments that focus on a single country or region. Important Additional Information and Disclosures Source of all data: Eaton Vance, as of October 31, 2020, unless otherwise specified.  

This material is presented for informational and illustrative purposes only. This material should not be construed as investment advice, a recommendation to purchase or sell specific securities, or to adopt any particular investment strategy; it has been prepared on the basis of publicly available information, internally developed data and other third-party sources believed to be reliable. However, no assurances are provided regarding the reliability of such information and Eaton Vance has not sought to independently verify information taken from public and third-party sources. Investment views, opinions, and/or analysis expressed constitute judgments as of the date of this material and are subject to change at any time without notice. Different views may be expressed based on different investment styles, objectives, opinions or philosophies. This material may contain statements that are not historical facts, referred to as forward-looking statements. Future results may differ significantly from those st

In the United Kingdom, this material is issued by Eaton Vance Management (International) Limited ("EVMI"), 125 Old Broad Street, London, EC2N 1AR, UK, and is authorised and regulated by the Financial Conduct Authority. EVMI markets the services of the following strategic affiliates: Parametric Portfolio Associates® LLC ("PPA"), an investment advisor registered with the SEC. Hexavest Inc. ("Hexavest") is an investment advisor based in Montreal, Canada and registered with the SEC in the United States, and has a strategic partnership with Eaton Vance, and Calvert Research and Management ("CRM") is an investment advisor registered with the SEC.

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