Boston - Eaton Vance and its affiliates seek to actively capitalize on opportunities presented by volatile investor sentiment, while ensuring that the portfolio risk profile remains appropriate for the specific strategy. The following are excerpts from a recent conversation with Michael A. Cirami, CFA, Co-Director of Global Income for Eaton Vance Management.
What we are seeing: Global markets have settled into a more normal, high-volatility environment from the extreme volatility over the past few weeks. In addition, the market has been paying more attention to fundamentals and there's been a notable performance dispersion between the debt of different countries. Broadly, this is a good environment for us, given our focus on individual country-level policy and economic fundamentals.
We have begun to see the ratings agencies downgrade countries as they've been doing with corporates; for example, Moody's did so with South Africa on March 27, a country we've long had a negative view on. Also of note, Oman was downgraded by Standard & Poor's last week, firmly into "junk" status. Moody's made a similar move about three weeks ago. Downgradings for many other sovereign credits are likely to follow in the not-too-distant future.
What we are doing: We had been building up liquidity and trimming risk in previous weeks, in anticipation of a more volatile environment. At this point, while it is still early, we have begun to take small steps to add risk, as valuations are cheap and compelling opportunities have arisen. For example, we've been nibbling on some very cheap positions that have sold off well beyond fundamentals, mostly in the hard currency and sovereign credit space.
What we are watching: The EM debt team believes there are three interlocking factors that will eventually be the catalyst for a rebound in the sector:
- A lower bound for asset prices. At some point, valuations are so low that downside risk is minimal, in our view.
- Clarity on the spread of COVID-19. We will be looking for a flattening of the growth curve as it pertains to each country.
- Policy responses. Governments are ramping up large-scale social distancing, testing and health care infrastructure combined with economic relief.
As negative examples in the third category, we've seen some assets in Brazil and Mexico continue to underperform due to their weak COVID-19 policy responses. In addition to South Africa, assets in Turkey, Russia and Qatar have all remained under stress for a variety of reasons specific to those countries.
Bottom line: Given the huge leg down in core bond yields around the world, and the aggressive actions taken across the board by the Fed and other central banks, we see a clear scenario emerging on the back end of this. We believe EMD will be even more attractive to investors in search of yield.