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, and Eric Stein, CFA, Co-Directors 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. As hot-spot countries like Spain and Italy hopefully have passed their peak mortality rates, global markets appear to be finding their footing. In particular, investors have been paying more attention to fundamentals and there has been a notable performance dispersion between the debt of different countries. That said, we do not believe markets have necessarily seen their floors, as the adverse economic ramifications from virus prevention policies will be severe and vary by country, and it's not clear this has been fully discounted at this time.
Despite the unsettled conditions, we believe that a market that differentiates based on fundamentals 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 on which we've long had a negative view. 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. Downgrades of many other sovereign credits are likely to follow in the not-too-distant future.
Much more important than downgrades — which are not part of our investment process — is the fact that the occurrence of sovereign restructurings will likely increase. Countries we have already noted as having sought restructuring include Argentina, Lebanon, Zambia and Ecuador. It also appears that Angola, Sri Lanka and Oman, among others, may be heading in that direction.
What we are doing: While we continue to favor maintaining low levels of risk and high levels of liquidity, as noted, we have begun to "nibble" at positions where we believe market volatility has pushed valuations substantially below what we believe are fair. This has primarily been within the hard-currency sovereign credit space, where the proverbial baby has been thrown out with the bath water. Some of the actions we had taken leading up to and into March have begun to bear fruit, including some short positions we added and some long positions we trimmed.
What we are watching: The sell-off has given us the opportunity to look for investments in keeping with the higher-quality macroeconomic developments we are following. We encourage investors to turn attention from the shocking impact of the first wave of COVID-19 infections, and consider the lasting effect that this will have on global trade patterns, consumer preferences and the economic reform momentum of countries.
While its assets are not particularly compelling, South Korea has been an excellent example of the kind of policy response we have been looking for. It was one of the first countries to scale up testing and isolation of patients. It is still tightening its controls even as new cases slow to under 50 per day.
Final word: Given the huge leg down in core bond yields around the world, the aggressive actions taken across the board by the Fed and other central banks, and the heightened levels of volatility across traditional markets, we see a clear scenario emerging on the back end of this: Investors will be seeking out alternative sources of income and total return from around the world.