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EM: Return of the Fed

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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 Team, Eaton Vance Management

      Boston — The 2019 emerging-market (EM) debt rally kept on rolling, as a dovish U.S. Federal Reserve and European Central Bank (ECB) supported the asset class, following a strong first quarter. All three indexes were strongly positive for the second quarter (see chart below).

      • Local sovereign debt index performance was up 5.64% with all risk factors - FX, the euro/U.S. dollar exchange rate, rates and carry - contributing to positive returns.
      • External sovereign debt index performance finished up 4.08% for the quarter. Decline in U.S. Treasurys was the main driver of positive external debt performance, but spread tightening also contributed.
      • EM corporate debt index performance was up 3.50% for the quarter, driven by declining U.S. Treasury yields and sovereign spread compression. Corporate credit spread widening was a slight detractor from performance.

      Inflows to the asset class were mixed throughout the quarter but in aggregate were still positive.

      Falling rates and tightening spreads powered an impressive quarter for EM debt.

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      Despite the very strong first half of the year, we remain very constructive on the EM debt asset class. This is supported by Fed and ECB dovishness, improving country fundamentals and asset class flows. Contrary to our assessment at the beginning of the year, the Trump administration continues to be a major source of instability to risk assets in general and EM specifically.

      As the EM "beta" rally matures, we believe individual country fundamentals will matter more. On the positive side, a number of countries, like Indonesia, Ukraine and Turkey, are engaging in meaningful reform programs. It is a different story in countries like Ghana, South Africa and Zambia, where growth prospects are poor.

      Bottom line: After the sharp rally for the first half of the year, we remain constructive on EM debt, yet still caution that investors considering EM debt rely on country-specific due diligence and careful evaluation of risk factors.