Rising interest rates have made fixed income investing challenging and returns hard to come by. But for managers following a global macro strategy, finding investment opportunities is the least of their worries.
Take Michael Cirami, a vice president and co-director of global income at Eaton Vance Management and portfolio manager on the firm's global income team.
“There are a lot of investment opportunities in the sandbox that we get to invest in – 126 countries – that asset owners are not getting exposure to elsewhere,” Cirami said. “But it's a challenging market. It's an interesting market.”
The Federal Reserve's unwinding of what Cirami called “extraordinary policy accommodations” after the global financial crisis that bolstered capital markets around the world is a primary challenge, along with a White House “that likes to throw curveballs,” he said. Not to mention the turmoil rippling through emerging markets sparked by fears of a crisis in Turkey and weakness in China's currency, the yuan.
“There are a lot of things to keep tabs on,” he said. “Global macro funds are set up to be very mindful of these types of risks and look at them from the perspective of opportunity.
“You could look wide and far and there are not a lot of things that jump out as having extraordinary value, which makes things complex,” he said, adding that a late second-quarter selloff in major emerging markets such as Brazil, Mexico, Turkey, South Africa and Indonesia has brought asset prices to more reasonable levels.
Finding Value in Uncommon Places
Where there is value, Cirami said, is in countries where the fiscal and monetary environments are improving, that are largely overlooked by broader emerging market trends and dynamics. For example, he cited Egypt and Serbia.
“There are a lot of things to be said about Egypt and the policy mix there,” he said. “They're really correcting that ship at a reasonable pace – removing subsidies, talking about selling stakes in some [state-owned enterprises]. These types of things are encouraging for a country that, since the Arab Spring, has had more negatives than positives.”
Similarly, over the last seven years, Serbia has undergone “quite a transformation” that has not been well understood by the mainstream investment community.
Countries like these offer idiosyncratic opportunities that can help deliver incremental returns over the risk-free rate, with compensation in line with the risks taken. In other words, high Sharpe ratios, which is what Cirami and his team strive for.
In addition, “low beta and correlation to traditional portfolio risks, whether U.S. Treasuries, the equity market or the credit market,” he said.
Of course to capture the full value of a global macro strategy, investors need to be in it for the long haul. The trends that Cirami and other global macro managers take advantage of typically develop over the course of many years.
“We are medium to long-term investors so our model is to look at policies and have a view on how those policies translate into economic outcomes and how those economic outcomes translate to asset prices,” Cirami explained. “That usually plays out over multiple years.” ■