World Bank report scandal highlights the need for independent EM research



Quarterly Core Bond Outlook - January 2021

In our view, we are entering the phase of the cycle where finding opportunities in the fixed income markets is becoming more challenging and security selection will matter even more. While we believe 2021 will be a much better year than 2020 from a macroeconomic standpoint, we are less positive in our outlook for 2021 U.S. fixed-income returns, mainly because of the starting point for spreads and rates.
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By Emerging Markets Debt TeamEaton Vance Management

Boston - On August 27, the World Bank suspended publication of its flagship "Doing Business" report, which has been viewed as one of the premier international rankings. The 2020 report ranked 190 countries based on the ease of doing business, grading each on a sample of 41 metrics such as starting a business, dealing with construction permits and registering property.

The suspension of the report should be viewed as a cautionary lesson for emerging markets investors, underscoring the importance of independent research and due diligence in the sector.

The World Bank said it is "conducting a systematic review" after "a number of irregularities" have been reported in the past several reports. It said that the irregularities affected China, Saudi Arabia and the United Arab Emirates, and in 2018, it acknowledged that its staff had manipulated Chile's results to the detriment of the country. In the 2020 Doing Business report, China and Saudi Arabia were cited as two of the countries with the greatest improvement. Source: Wall Street Journal, 1/12/18.

The Eaton Vance global income team long has recognized that publicly reported economic data, especially in emerging markets, may be of low quality. Furthermore, it should not be particularly surprising that the World Bank, a large institution owned by the member states, is potentially vulnerable to problems like internal politicking.

That is why the global income team's investment process relies primarily on independent, verifiable data and firsthand knowledge, to the greatest extent possible. Here are some keys to our approach:

  • We use the "mosaic" theory to collect a lot of data and independent anecdotes instead of relying on one key data figure or data source.
  • We focus on primary data, firsthand from the individuals involved. As an example, we frequently consult business executives (i.e., the "real" economy) to verify published economic policies. Despite the pandemic's interruption of travel, we can still rely on a strong network of primary data sources and insights, developed over decades of "in-country" experience.
  • We seek dissenting views from sources such as think tanks and political opposition. This helps identify where economic policies may be having unintended consequences or may simply be fake news.

Bottom line: From our perspective, unreliable EM public data can result in mispriced assets and a potential source of alpha, as we use our own data to make investment decisions. Ronald Reagan famously said "trust but verify," and the World Bank episode shows that the Gipper had it exactly right.

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 strategy. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness.