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, in both developed and developing countries, continued to rally against a backdrop of strong fiscal and monetary support. In emerging markets, new issuers included Romania, Abu Dhabi and North Macedonia — a clear signal that EM investors are open to a wider range of sovereign issuers, broadening out beyond investment grade to include better-quality high-yield EM debt.
We have begun to see the return of geopolitics as a driver of the markets. While COVID-19 continues to be front and center as a macoeconomic, societal and market force, some of the same issues that were prevalent pre-pandemic began to reassert themselves. UK Prime Minister Boris Johnson spoke about accomplishing Brexit in 2020. President Trump and Secretary of State Mike Pompeo talked about the virus's origination in Wuhan and whether China covered it up. A geopolitical fissure began to emerge in reaction to China's new law that supersedes the Hong Kong constitution and threatens the end of "one country, two systems."
All these issues were dominant before COVID-19, and we expect they will once again resume their importance to world markets, even as the ramifications of the pandemic continue to emerge.
What we are doing: While we continue to invest with low levels of risk and high levels of liquidity and some dry powder, as noted we have begun to "nibble" at opportunities where we believe market volatility has pushed valuations substantially below what we believe are fair. As examples, our long positions (as of March 31, 2020) include local bonds in Ukraine, Serbia and Iceland; interest rates in China, and sovereign credit in Egypt and Romania. Notable short positions include several gulf country currencies, where we believe their dollar pegs are likely to be strained with the collapse in oil prices, as well as additional shorts in both South Africa and Turkey.
What we are watching: In this environment, fundamental global research capabilities will be especially important, to gauge how well countries are managing the challenging health, social trends and policy factors. For example, we need to consider:
- How well the epidemic's curve is being controlled, and the extent of the at-risk population and COVID-19 mortality rates.
- The strength of public support for mitigation efforts, and the time to effective treatments and vaccine.
- The ability of a significant part of the economy to work from home, and the degree to which such a shift is permanent and productivity enhancing.
- The effectiveness of fiscal and monetary policies.
- The timeliness and extent of relief efforts of the IMF, World Bank, UN and G-20 nations.
- How quickly external demand recovers for country outputs, including factors like the price of oil and China's recovery.
Final word: Pre-pandemic geopolitics are returning to influence global markets, even as the world still struggles to adapt to COVID-19. During this historic recovery, the fundamental research capability required to identify potential winners and losers has never been more crucial.