Michael Cirami

Eaton Vance is currently upbeat about the investment prospects for local-currency-denominated Emerging Market Debt (EMD).

The Eaton Vance EMD team, managing U.S.$8.4 billion in assets, has EM FX as a clear “overweight” risk factor for the first time ever. The team is simultaneously positive (“moderate overweight”) on EM local interest rates, EM sovereign credit and EM corporate credit.

Michael Cirami, Director of Global Income and Matthew Murphy Jr., Senior Institutional Portfolio Manager at Eaton Vance Management, in a recent paper note: “Reasons for this bullish stance include dovish policies of G3 central banks, low yields in core bond markets, increasing deficits in the United States and attractive relative valuations.”

Below is a summary of the reasons for this upbeat outlook, particularly in relation to local-currency:

1. Emerging economies are driving the rebound in global economic growth: Emerging-market economies did not shut down to the degree that occurred in developed-market economies in the face of COVID-19 in 2020, and neither are they are shutting down as aggressively now.
2. Emerging-market debt assets have lagged the rally in developed-market assets: Despite the positive growth differentials (EMD) assets lagged the recovery in a number of developed-market assets in 2020.
3. The macro environment is very favourable for EM debt: Further, we believe we are seeing one of the most favourable macro environment for EM debt in decades
4. Positives for EM debt assets are not priced in: The positives for EMD – better growth in emerging market economies, relatively attractively priced EM debt assets and a very favourable macro environment in decades – are, on the whole, not priced in.
5. Capital markets are open to issuers: In the first half of 2020, there was a lot of fear about solvency as it relates to liquidity in different emerging markets. Investors wanted to know whether funding would be available to countries and credits, including in the corporate space. The good news is that over the second half of 2020 and continuing into January 2021, capital markets have been wide open to issuers.

Cirami adds: “Eaton Vance’s EMD team sees attractive FX investment opportunities in Uruguay, Colombia, Mexico and Indonesia, countries that are in the widely used local currency benchmark: J.P. Morgan Government Bond Index Emerging Markets (GBI EM) Global Diversified. We also see some attractive opportunities outside of the benchmark – notably Egypt, Serbia, Ukraine and Uzbekistan. Within the benchmark, we are positive on duration in Indonesia, Uruguay, Russia, Thailand and Malaysia. Outside of the benchmark, we are also positive on duration in Serbia and Ukraine.

“While highlighting specific opportunities, it is worth highlighting that, within EMD, investors need to be careful and selective when approaching this highly differentiated asset class. On the flip side to the investment opportunities we have mentioned, there is also the growing problem in some countries – Oman being one, South Africa being another – of budget deficits and debt build up. This is an important topic and one that is not going away anytime soon,” says Cirami.

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As Chief Investment Officer, Fixed Income, Mr. Stein will be responsible for overseeing the management of investment strategies for EVM and its affiliate Calvert Research and Management (Calvert) across the income markets, including floating-rate loans, high-yield bonds, municipal bonds, emerging market debt, mortgage-backed and asset-backed securities, investment-grade corporate and government bonds, and multi-asset income solutions for individual and institutional clients.  As of July 31, 2020, assets under management in EVM and Calvert income strategies totaled $90.2 billion.

Mr. Stein has served as Co-Director of Global Income Investments with Michael A. Cirami, CFA, since 2012.  Mr. Cirami will become sole Director of Global Income Investments, in which capacity he will continue to lead EVM’s Global Income group, reporting to Mr. Stein.

“I am pleased to announce Eric’s promotion to Chief Investment Officer, Fixed Income,” said Mr. Faust. “Under his leadership, I am confident that EVM’s income investment teams will continue the commitment to investment excellence and outstanding client service that has been their hallmark throughout Payson’s long tenure.”

Addressing Mr. Cirami’s elevation to sole Director of Global Income Investments, Mr. Stein commented, “Mike is an incredibly talented investor and passionate business builder whose leadership and vision have been instrumental to our success in global income investing.  I look forward to continuing to work closely with Mike in our new roles.”

Mr. Stein joined EVM in 2002, serving as a trading associate and research associate in the Global Income group before leaving to attend business school in 2005.  He rejoined EVM’s Global Income group in 2008 as a research analyst from the Federal Reserve Bank of New York, where he worked on the Markets Desk. He has additional experience at Citigroup Alternative Investments.  Mr. Stein earned a B.S., cum laude, from Boston University and an MBA, with honors, from the University of Chicago Booth School of Business. He is a CFA charterholder, term member of the Council on Foreign Relations and member of the CFA Society Boston, Boston Committee on Foreign Relations, Boston Economic Club, Enterprise Club and AEI Boston Council.

Mr. Cirami joined EVM in 2003 and started his career in the investment management industry in 1998. Before joining EVM, he worked at State Street Bank and BT&T Asset Management. Mr. Cirami earned a B.S., cum laude, from Mary Washington College and an MBA with honors from the William E. Simon School at the University of Rochester. He also studied at WHU Otto Beisheim School of Management in Koblenz, Germany. He is a CFA charterholder and member of the CFA Society Boston, Boston Committee on Foreign Relations and the Ludwig von Mises Institute.

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He added: “The start of 2016 has marked something of a comeback for emerging-market (EM) debt, which has advanced 13.4% for the year to date through April 20, based on the JPMorgan Government Bond Index-Emerging Markets (GBI-EM). This follows a difficult three-year stretch ending on December 31, in which the GBI-EM gave up almost a third of its value, hurt by sluggish global growth, falling commodities prices and a strong U.S. dollar.

“While a tail wind for the asset class is beneficial, we believe that investors tempted to increase EM exposure should carefully consider their investment approach.

“This is especially true given the expansion of the sector and the proliferation of EM indexes over the past two decades. For example, the first popular EM index – the JPMorgan Emerging Market Bond Index (EMBI) – was introduced in 1991 and comprised only government dollar-denominated debt. The GBI-EM followed in 2005 and comprises local currency sovereign debt. Today, the EM index set also includes proxies for corporate debt as well as lower-rated sovereign issuers.

“The newer indexes are useful in that they represent additional factors that can drive performance – foreign currencies, credit and lower-rated sovereign debt. However, investing in EM by allocating to indexes is essentially a top-down approach that, in our view, entails a number of drawbacks. For example:

1. Managers must focus on macroeconomic “big things,” like U.S. Treasury yields and global monetary policy. Big things clearly affect EM prices, but with the whole world’s scrutiny, it is hard for EM managers to make money from them in a repeatable fashion.
2. Index countries make up a limited universe that omits about two-thirds of the $32 trillion in GDP represented by emerging and developing markets, according to the IMF (see attached chart).
3. At any given time, index countries are likely to be unattractive investments, based on valuation, creditworthiness or other metrics EM managers use.

We believe a better approach is to focus on the small things, with bottom-up evaluation of all EM countries – not just those in a benchmark. This approach includes country-level macroeconomic and political research, and stand-alone analysis of specific risk factors, like interest rates, currencies, and sovereign and corporate spreads.

Bottom line: Indexes may be helpful as references, but we believe that “staying small” offers the best way to unlock the potential of EM debt.

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