Despite recent volatility and "contagion" rumors, Kathleen C. Gaffney and Henry Peabody of Eaton Vance's Diversified Fixed Income team consider that emerging debt still deserves a place in diversified bond portfolios, but with an important warning Eaton Vance experts believe that investors who rely on benchmarks to have exposure to emerging market debt may end up disappointed in the coming years.
In addition, at Eaton Vance they believe that it can be a mistake to simply have exposure to emerging markets, considering it to be a class of assets or sector that can add value to traditional market indices.
Instead, they favor a flexible approach that focuses on trying to identify countries that offer the best value within emerging markets, for example, those countries that face short-term challenges and can distract investors from their long-term potential. term. In other words, relying solely on traditional benchmarks may be too restrictive.
In many of the fixed income reference indices that cover a broad spectrum, the weight of an individual country is determined by its total debt in the markets. Therefore, the most indebted countries have a greater weight in the indices or benchmarks. Instead, Eaton Vance believes that it makes more sense to focus on countries with potential for improvement and reform, and also, on those that can offer convincing value after falling out of favor in the eyes of investors.
Focus "Barbell": invest where the growth is.
Although emerging market bonds have historically been more volatile than developed markets debt, Eaton Vance believes that long-term investors can ultimately be rewarded for bearing greater risk.
Also, if US rates continue to rise at the rate seen in the year, it would probably be a problem for sectors sensitive to movements in rates and investment grade, which are large holdings in many bond portfolios: example: Treasury bonds and investment grade corporate debt.
In fact, those two areas are perceived as expensive today, and it is one of the reasons why Eaton Vance seeks value in emerging markets. Shortening the duration to reduce the rate risk is a common response to the increase in rates, but this approach may be somewhat "old", according to Eaton Vance. Instead, they favor a "Barbell" approach, which consists of investing part of the capital in short-term securities, so that liquidity capitalizes the opportunities as they arise, while the opposite extreme includes securities with long-term value within the emerging markets.
"In our opinion, emerging market debt provides a source of long-term value, since countries such as Brazil , Mexico and India offer higher yields and higher growth potential than we find in developed markets. We believe that the recent crisis in emerging market bonds may have been exacerbated by investors seeking more short-term yields and that at the first sign of problems are running, this has been mainly due to tariffs and commercial fears " , they comment.
Where do you see opportunities in emerging markets?
Latin America is a particularly attractive region, because it has managed to increase the depth and liquidity of its markets, in a manner reminiscent of the developed world, when the high-yield bond market in the United States was introduced for the first time. Access to capital, depth and liquidity of these markets demonstrate how fixed income is becoming increasingly important for growth in the region.
"Latin America is grappling with the corruption that has slowed its growth throughout history. There are opportunities to assume country, currency and credit risks. Within the region, we like Mexico and Brazil . In both countries, sovereign bonds offer an attractive return: income that can not be obtained in the developed world. And, we perceive the policy as stable in Brazil with a long-term potential for improvement. The political climate is also improving in Mexico as a result of the recent elections. There was a lot of fear that populism would hit both countries, but we see that the tide is turning more towards reducing corruption, stability and improving the lives of the middle class, "they add from Eaton Vance.
The Mexican peso had been affected mainly by the elections in the United States and concerns about the border wall. Subsequently, the election of Andrés Manuel López Obrador (AMLO) caused another exodus in the currency. In its current state, it is economic in the long term and adjusted for inflation. As a result, in the opinion of Eaton Vance, the peso offers a value in comparison with the US dollar.
Although Brazil has recovered in recent weeks as a result of a stabilizing environment, a clear direction will not be seen until there is evidence of a reform of its pension expenditure. In any case, performance and fundamental direction support the perspectives of both Mexico and Brazil.
"This does not mean that we are moving away from Asia. We are looking for candidates with a potential for reform, highlighting the long-term potential of India. With a rising middle class, a rule of law and a solid educational system. Obviously, there is some uncertainty with this vision, but we like the general direction ", they conclude.<
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Source: Source: https://www.fundssociety.com/es/noticias/mercados/