Schroders Emerging Markets Lens Q2 2022: your go-to guide to emerging markets
Our quarterly analysis highlights the most salient charts and data for emerging markets investors.
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We are pleased to introduce the Q2 edition of the Schroders Emerging Markets Lens. It consists of separate emerging market (EM) equity and debt chartbooks/presentations, packed full of data and insights to help you navigate the world of emerging markets.
The aim here is to provide an unbiased top-down view of markets, with the main focus on EM valuations. Please note that the EM debt presentation is split into sections on hard currency debt, local currency debt, and currencies.
Below is a summary of key developments in the equity and debt markets and you can find the links to both presentations here:
Emerging Markets Lens: Emerging Market Debt
Summary of emerging market equities:
- Emerging market (EM) equities have weathered the impact of Russia’s invasion of Ukraine relatively well
- Latin American and Middle Eastern markets have been the top performers because of the tailwind of higher commodity prices. Eastern European markets are sharply lower. Chinese stocks rebounded sharply in March, but are still down for the year
- EM index valuation is becoming neutral, with the forward P/E just above the historical median. EM dividend yield is already above the median, as EM dividends recover
- There remains considerable variability between sector valuations in EM. Growth sectors, despite the recent correction in prices, are much more expensive than value sectors
- EM equites are cheaper than DM equities, but the difference is not extremely large, especially on a sector neutral basis. The recent correction in the DM IT sector has reduce the discount
- Valuations in Asia have fallen close to neutral. Because of the exclusion of historically cheap Russian market from the index, EMEA1 does not look extremely cheap anymore. Latin American stocks remain cheap despite recent gains
- The decade of US dollar appreciation has weighed on EM equity returns. Most EM currencies have depreciated in real terms, implying emerging value, although the extent varies significantly
Summary of emerging market debt:
Hard currency emerging market debt (EMD):
- Valuations are not overly attractive
- The spreads of investment grade (IG) sovereign and IG and high yield (HY) corporate indices are below their historical medians
- The spread of the HY sovereign index is above the historical median, as a number of smaller countries are hit by rising commodity prices
Local currency EMD:
- Local currency EM bond yields have continued to increase in 2022
- The key question is what impact the commodity price shock will have on inflation
- Offer a large real yield premium over developed market (DM) bonds
- Historically, this has led to strong performance of EM local currency bonds
- There are undervalued currencies in all three EM regions. On average, Latin American currencies are the cheapest, whereas Asian currencies have the least appealing value
A number of EM currencies are benefitting from higher commodity prices.
Important Information:
This material has been issued by Schroder Investment Management Australia Limited (ABN 22 000 443 274, AFSL 226473) (Schroders) for information purposes only. It is intended solely for professional investors and financial advisers and is not suitable for distribution to retail clients. The views and opinions contained herein are those of the authors as at the date of publication and are subject to change due to market and other conditions. Such views and opinions may not necessarily represent those expressed or reflected in other Schroders communications, strategies or funds. The information contained is general information only and does not take into account your objectives, financial situation or needs. Schroders does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this material. Except insofar as liability under any statute cannot be excluded, Schroders and its directors, employees, consultants or any company in the Schroders Group do not accept any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this material or for any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this material or any other person. This material is not intended to provide, and should not be relied on for, accounting, legal or tax advice. Any references to securities, sectors, regions and/or countries are for illustrative purposes only. You should note that past performance is not a reliable indicator of future performance. Schroders may record and monitor telephone calls for security, training and compliance purposes.
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