Investors should look at fundamentals in EM debt
Fundamentals are returning to the forefront as a key performance driver in emerging markets (EM) debt, according to Eaton Vance’s new study.
The study said that overall it maintained a neutral stance on EMD as it will be a challenging time for many countries and the price declines alone were not enough to compensate for this.
“We remain neutral on EM sovereign credit, a sector offering historically compelling valuations, but where many issuers are confronting a challenging macro environment,” the authors of the study said in the note.
“Looking ahead, we believe that the quality of research and analysis as well as the ability to access markets will be key for managers to achieve investment success at this critical time for EMD.”
On interest rates, the manager raised its outlook to an overweight view as it believed that interest rates were fairly compelling when compared to developed markets and adjusted for inflation as well as within the context of easing central bank policies.
“It’s worth noting that the markets with more robust and attractive interest-rate curves tend to be on the more developed side of the EMD space, rather than being among the higher-yielding, lower-quality names. On currencies, we've reduced our conviction from an overweight to neutral,” it said.
However, Eaton Vance warned investors that there would be a decent amount of differentiation for EM currencies as a whole and therefore they should go country by country as a lot of the sell-off was justified, with currencies appearing fairly valued at this point.
The firm maintained a neutral view on sovereign credit explaining that although it believed that valuations appeared attractive on a historic basis and saw scope for possible improvement as clarity surrounding the recovery improves, many issuers would be still confronted by a challenging financial and economic environment in the short term.
“Lastly, we upgraded corporate credit to a moderate overweight. While it's a tough economic environment, EM corporate credit is a rich universe and a lot of the issuers are national champions and important companies with access to capital markets and financing.
“In fact, we think these companies may be a little better prepared to deal with sudden stops in business than their counterparts in the developed-market world,” the firm said.
The authors of Vance Eaton’s paper were Michael A. Cirami, CFA portfolio manager co-director of global income, Marshall L. Stocker, Ph.D., CFA portfolio manager director of country research global income team and Bradford Godfrey, CFA institutional portfolio manager director of alternative and asset allocation strategies.
AUTHOR
Oksana Patron
Recommended for you
Selfwealth has provided an update on the status of its scheme implementation deed with Bell Financial Group as well as whether rival bidder Svava remains in the picture.
Magellan Financial Group has reported its first half FY25 results while appointing a new chief financial officer and promoting Sophia Rahmani to chief executive.
Schroders Australia has launched two active ETFs and plans to further expand its listed range over the year ahead.
Platform Netwealth has reported its financial results for the first half of FY25, reporting an 80 per cent increase in net flows, with its CEO viewing a “huge opportunity” from private assets.
