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Charting the milestones for an eventual EM rebound

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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 fund. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. Past performance is no guarantee of future results.

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      By Emerging Markets Debt TeamEaton Vance Management

      Boston - The emerging-markets debt team believes there are three interlocking factors that will eventually be the catalyst for a rebound in the sector:

      1. A lower bound for asset prices. At some point, valuations will be so low that downside risk will be minimal, in our view.
      2. Clarity on the spread of COVID-19. We will be looking for a flattening of the growth curve as it pertains to each country.
      3. Policy responses. Governments are ramping up large-scale social distancing, testing and health care infrastructure combined with economic relief.

      Clearly, we are in the early stages of coming to terms with all three. Policy responses will be an optimization exercise, in that shutting down business may be necessary to contain the spread of the virus, but it will also be a drag on the economy. It will be a balancing act that policymakers will have to calibrate, will be very difficult and will vary from country to country. This process suggests that the recovery in EM countries won't be a uniform V shape, with one sharp rebound. Rather, it is more likely to be a W shape, with different countries recovering on their own timetables.

      We have received many inquiries about liquidity in EM debt, and it is certainly challenged, as is the case in every corner of the capital markets right now. But trades are getting done, in large part because of the global trading infrastructure the EM debt team has developed over the past 20 years.

      For some time, we have pointed out that local-currency EM debt is often more liquid than sovereign or corporate dollar-denominated issues. That is because there are a variety of local institutions like pension funds and banks, which actively trade in local debt, and the local market is less susceptible to developed-market pressures. This discrepancy in liquidity has widened during the recent volatility, with local-currency debt holding up better than the other two sectors. In particular, sovereign credits have been affected by selling pressure from ETFs looking to liquidate and raise dollars.

      In terms of positioning EM strategies, we have been building up liquidity in previous weeks in anticipation of this kind of this environment. It is still early and we have just begun to take small steps as valuation opportunities have arisen. We have room in our portfolios to dial up risk exposure, but we are being very selective and also maintaining liquidity.

      Bottom line: From a professional perspective, the EM debt team is highly experienced at evaluating monetary and fiscal policy, and well acquainted with the crisis mentality and volatile episodes that are inevitable in this sector. Our pledge to clients and prospects is to use this skill set to maximize value in our portfolios through this difficult period, until the longer-term growth trajectory that has historically characterized EM countries once again comes into view.