Emerging & Frontier Markets

Emerging & Frontier Markets: You’re Wrongly Predicting Them

The education of an developing markets fund manager

Orlando CFA Society February 2019 Marshall L. Stocker, Ph.D., CFA 2 |

Photograph: Gerard Malie / AFP/Getty Images 3 | East Berlin (Then) East Berlin (Now)

Rykestraβe, Berlin Photograph: www.ryke37.de 4 |

Photograph: David Degner, New York Times 5 |

Photograph: Yannis Behrakis/Reuters 6 | Cairo (When I Arrived)

Photograph: Marshall L. Stocker 7 | Cairo (When I left)

Photograph: Marshall L. Stocker Countries Matter the Most 9 |

Fall 2016, 25 (3) 38-47

Triage in a Global Financial Crisis: Countries, Sectors, or Stocks?

Marshall L. Stocker 10 | Countries Matter the Most

Emerging & Frontier Country Equity Index Returns (USD) Rolling One Year Correlations 0.9

0.8

0.7

0.6 n o

i 0.5 t a l e r r

o 0.4 C

0.3

0.2

0.1

0 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 0 0 0 0 0 0 0 0 0 1 1 1 1 1 1 1 1 1 9 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2

Source: Eaton Vance Management, MSCI 11 | Countries Matter the Most

35% Developed Market Countries Developed Market Sectors Emerging Market Countries Emerging Market Sectors 30% s Style selection (Growth/Value; Large/Small) n r u t e R

o 25%

n o i t a i v e

D 20%

d r a d n a t S

15% d e z i l a u n

n 10% A

5% 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 0 0 0 0 0 0 0 0 0 1 1 1 1 1 1 1 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2

Source: Eaton Vance Management, MSCI 12 | Countries Matter the Most

Predicted vs. Actual Excess Monthly Returns Developed and Emerging Market Mutual Funds ) 0 % ( 2

] q e R

f m 0 1 R [

: s n r u t e R 0

s s e c x E

l a 0 u 1 t - c A 0 2 - -10 -5 0 5 10 Predicted Excess Return Based on Country Weights: [Rca - Req] (%)

Source: Stocker, M.L. Fall 2016. Triage in a Global Financial Crisis: Countries, Sectors, or Stocks? The Journal of Investing, 25 (3) 38-47 Economic Freedom Matters A Whole Lot Too 14 | Economic Freedom 15 | Measuring Economic Freedom

5 Components

1. Size of Government

2. Rule of Law

3. Sound Money Supply

4. Freedom to Trade Internationally

5. Regulation 16 | Economic Freedom exists when:

• Have secure rights to property

• Are free to engage in voluntary transactions

• Are free of government control over contractual terms

• Are free from governmental expropriation 17 | Economic Freedom Trends

Source: Gwartney, J., Lawson, R., & Hall, J. (2017); Economic Freedom of the World: 2017 Annual Report; Fraser Institute. 18 |

Photograph: Gerard Malie / AFP/Getty Images 19 | Poverty 20 | Economic Freedom & Poverty

Economic Freedom and Poverty

Extreme Poverty 50 Moderate Poverty ) 40 % (

t 30 a R

y 20 t r e

v 10 o P 0 Least Free Third Second Most Free Economic Freedom Quartile, 2018

Source: Gwartney, Hall, Lawson, and Murphy 2018, Economic Freedom of the World: 2018; World Bank, 2016, World Development Indicators. 21 | Infant Mortality 22 | Economic Freedom & Infant Deaths

Economic Freedom and Infant Mortality Rate 46.7 (Per 1,000 Live Births, 2015)

29.3

22.5

11.7

5.4

Bottom Fourth Third Second Top

EFW Index Quintiles, 2016

Source: Gwartney, Hall, and Lawson, 2016, Economic Freedom of the World: 2016 Annual Report; World Bank, 2015, World Development Indicators. 23 | Child Labor 24 | Economic Freedom & Child Labor

Economic Freedom and the Percentage of Children in the Labor Force (Ages 5 to 14 years, 2016) 20.6%

14.7%

11.7%

8.7%

1.5%

Bottom Fourth Third Second Top

EFW Index Quintiles, 2016

Source: Gwartney, Hall, and Lawson, 2016, Economic Freedom of the World: 2016 Annual Report; Unicef, Global Databases, 2016. 25 | Corruption 26 | Economic Freedom & Corruption

Economic Freedom and Corruption (Perceptions Index Score, 2016) 68.5

47.0 39.5 35.7 27.9

Bottom Fourth Third Second Top

EFW Index Quintiles, 2016

Note: Corruption is measured on a scale from zero to 100: zero = highly corrupt; 100 = little or no corruption.

Source: Gwartney, Hall, and Lawson, 2016, Economic Freedom of the World: 2016 Annual Report; Transparency International, Corruption Perceptions Index 2016. 27 | Equity Market Returns 28 | Equity Market Returns 29 | Equity Market Returns 30 |

The Price of Freedom: A Fama-French Freedom Factor

Emerging Markets Review 26 (2016) 1–19

Marshall L. Stocker 31 | Equity Market Returns

Country-level Equity Market Returns (1970-2015)

Economic Freedom segments investment outcomes (2000-2016)

Macro-economic policy differentiates Emerging Market performance (2000-2016)

Macro-economic Policy and Bear Markets (‘00 – ‘02, ‘08, ‘11, ‘15)

Stocker, M. L. (2005). Equity returns and economic freedom. Cato Journal, 25, 583. Stocker, M. L. (2014, forthcoming). Macro-economic policy explains country-level equity returns. EVM white paper. 35 | Equity Valuation The Developing Markets Are Everywhere 37 | Which Countries? EM and FM Argentina Kazakhstan Slovenia Botswana Bahrain Kenya South Africa Cambodia Korea, South Sri Lanka Bangladesh Cyprus Kuwait Taiwan Georgia Brazil Lebanon Thailand Iceland Bulgaria Lithuania Tunisia Myanmar Chile Malaysia Turkey Ukraine Mauritius Ukraine China Mexico United Arab Emirates Colombia Morocco Vietnam Croatia Nigeria Czech Rep. Oman Pakistan Egypt Peru Estonia 55+ Countries Philippines Greece Poland Vs. Hungary Qatar Romania India 24-Country MSCI EM Index Russia Indonesia Saudi Arabia Jordan Serbia 38 |

Photograph: Gerard Malie / AFP/Getty Images 39 | Economic Freedom Emerging & Frontier Markets: You’re Wrongly Predicting Them

The education of an developing markets fund manager

Orlando CFA Society February 2018 Marshall L. Stocker, Ph.D., CFA The views expressed in this document are those of the presenters 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 fund. Eaton Vance does not provide legal or tax advice. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. Individuals should consult their own legal and tax counsel as to matters discussed. Investments in foreign instruments or currencies can involve greater risk and volatility than U.S. investments because of adverse market, economic, political, regulatory, geopolitical, currency exchange rates or other conditions. In emerging or frontier countries, these risks may be more significant.

Thank you. For more information, please contact:

Eaton Vance Management. Two International Place Boston, MA 02110 800-836-2414 eatonvance.com 42 | Emerging market returns

GDP growth China USA 1991-2017 4000% • China • 1991 through 2017 3000% • Chinese GDP grew 31-fold 2000% • US GDP 2.1 x’s • S&P is up 9.8 x’s 1000% • Shanghai Composite is up 14.7 0% x’s GDP Growth Equity Index Return

Source: World Bank; Bloomberg 43 | CFA Curriculum

Guideline Exam Weights Topic Level I Level II/III Ethics 15% FinancialReporting&Analysis 15% EquityInvestments 11% FixedIncome 11% Corporate Finance 10% Economics 10% 5-10% Quants 10% Alternatives 6% Derivitives 6% Portflio Management 6% Total 100%

Source: https://www.cfainstitute.org/programs/cfa/curriculum/study-sessions 44 | Human Development 45 | Economic Freedom & Human Development

Economic Freedom and Human Development (Index Score, 2015) 0.87 0.78 0.69 0.65 0.55

Bottom Fourth Third Second Top

EFW Index Quintiles, 2016

Note: The United Nations Human Development Index is measured on a scale from zero to one: zero = least developed; one = most developed.

Source: Gwartney, Hall, and Lawson, 2016, Economic Freedom of the World: 2016 Annual Report; United Nations Development Program, Human Development Indicators 2015.