IN FOCUS6-8 min read

Schroders Emerging Markets Lens November 2023: your go-to guide to emerging markets

After the risk aversion of recent months, what do EM valuations look like?

01/11/2023
emerging-markets-lens

Authors

Andrew Rymer, CFA
Senior Strategist, Strategic Research Unit

Our latest edition of the Schroders Emerging Markets Lens is now available.

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: Equity

Emerging Markets Lens: Emerging Market Debt

Divergent US and China performance dominates YTD picture

YTD EM and global equity market returns (USD)

EN

Past performance is not a guide to future performance and may not be repeated.

Total return, US dollars. Source: LSEG Datastream, MSCI, Schroders Strategic Research Unit, as at 31 October 2023.

Summary of emerging market equities:

– Renewed conflict in the Middle East weighed on risk appetite in October. Emerging market (EM) equities fell 3.9%, declining for a third consecutive month, and lagged developed markets (-2.9%).

– EM lags developed markets (DM) by a sizeable margin YTD, largely explained by divergent US-China market performance (slide 9). Headline EM returns also mask wide country and regional return dispersion (slide 8)

– EM small caps are handsomely outperforming wider EM YTD, and are ahead of DM (slide 10). In styles, EM Value is ahead of the standard EM Index YTD; almost the opposite of DM factor performance where Growth leads (slide 11)

– EM equities are cheap on a range of measures. The 12-month forward price-earnings and price-book ratios are below the historical median and EM is particularly cheap on a dividend yield measure (slides 16, 20 and 21)

– A 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

Most of EM is cheap but the degree varies

EM valuation heatmaps – current z-scores¹

EN

¹The z-score is a measure of how far valuations are from historical mean, calculated since January 2000. Excludes UAE, Qatar, Saudi Arabia and Kuwait due to limited data history. Combined figure is an average of trailing P/E, 12-month forward P/E, P/B, and dividend yield. Source: Schroders, Refinitiv Datastream, MSCI, IBES, Schroders Strategic Research Unit. Data as at 31 October 2023. 

Summary of emerging market debt:

Emerging market (EM) bonds lost value in October amid conflict in the Middle East and ongoing upward moves in US Treasury bond yields. On a year-to-date basis, EM bonds remain in positive territory, with some variation in returns within the asset class (Slide 4)

EMD has generated positive returns year-to-date, led by EM local bonds

Total return year-to-date

EN

Note: Local currency = US dollar for all apart from local EMD which is in the relevant local EM currency. Source: Schroders, LSEG Datastream,  JP Morgan, Schroders Strategic Research Unit. Data as at 31 October 2023.

Hard currency emerging market debt (EMD):

– The sovereign EM bond index yield and spread are elevated relative to their long-term history (slides 8-9).

– The above-median hard EMD spread is driven by the high yield (HY) sovereign index. The spread on the investment grade (IG) sovereign market is below its historical average, and remains close to 15-year lows (slide 9)

– In corporate EMD, the IG spread is below the historical median; HY is now in line with its median (slide 12)

Local currency EMD:

– The real yield premium of EM over DM is picking up from a low level. Both the average EM and DM real yields are rising, with EM well into positive territory again; the average DM real yield is still negative

– The average local EM yield curve has moved close to flat (slide 27)

– There are undervalued currencies in all three EM regions (slide 33), but the degree of value varies significantly

EMD headline valuations

Spread percentiles - Spreads of key EMD indices (basis points)

EN

Source: Schroders, LSEG Datastream, J.P. Morgan. Data as at 31 October 2023. Spreads are adjusted for changes in the distribution of credit ratings within each index over time. Percentiles shows where the current spread is relatively to the historical range of spreads, within a range of 0 to 100. The greater the percentile the higher the spread compared to history. Hard EMD =stripped spread, Local EMD =Spread to 5 year UST, Corporate EMD = spread to worst.

Real exchange rate: deviation from average

EN

Source: Schroders, Refinitiv Datastream. Data as at 31 October 2023. Real exchange rate is the nominal dollar exchange rate deflated by the consumer price index (CPI) of each EM country vs. US. Long term average is since January 1995.

Important Information:

This document is issued by Schroder Investment Management Australia Limited (ABN 22 000 443 274, AFSL 226473) (Schroders). It is intended solely for wholesale clients (as defined under the Corporations Act 2001 (Cth)) and is not suitable for distribution to retail clients. This document does not contain and should not be taken as containing any financial product advice or financial product recommendations. This document does not take into consideration any recipient’s objectives, financial situation or needs. Before making any decision relating to a Schroders fund, you should obtain and read a copy of the product disclosure statement available at www.schroders.com.au or other relevant disclosure document for that fund and consider the appropriateness of the fund to your objectives, financial situation and needs. You should also refer to the target market determination for the fund at www.schroders.com.au. All investments carry risk, and the repayment of capital and performance in any of the funds named in this document are not guaranteed by Schroders or any company in the Schroders Group. The material contained in this document is not intended to provide, and should not be relied on for accounting, legal or tax advice. Schroders does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this document. To the maximum extent permitted by law, Schroders, every company in the Schroders plc group, and their respective directors, officers, employees, consultants and agents exclude all liability (however arising) for any direct or indirect loss or damage that may be suffered by the recipient or any other person in connection with this document. Opinions, estimates and projections contained in this document reflect the opinions of the authors as at the date of this document and are subject to change without notice. “Forward-looking” information, such as forecasts or projections, are not guarantees of any future performance and there is no assurance that any forecast or projection will be realised. Past performance is not a reliable indicator of future performance. All references to securities, sectors, regions and/or countries are made for illustrative purposes only and are not to be construed as recommendations to buy, sell or hold. Telephone calls and other electronic communications with Schroders representatives may be recorded.

Authors

Andrew Rymer, CFA
Senior Strategist, Strategic Research Unit

Topics

EmergingMarketsLens
Emerging Markets
China
Our sales team is available to discuss with you any investment opportunities.
Follow us

This website is owned and operated by Schroder Investment Management Australia Limited (ABN 22 000 443 274, AFSL 226473).  Your access to this website is subject to the Terms of Use found by clicking the ‘Important Information’ link below.  By using this website, you agree to be subject to these Terms of Use.