Schroders Emerging Markets Lens March 2024: your go-to guide to emerging markets

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

YTD trends similar to the experience of 2023 in equities…

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

Total return, USD. Source: Schroders, LSEG Datastream, MSCI, Schroders Strategic Research Unit. Data as at 29 February 2024.

Summary of emerging market equities:

• EM equities returned 5% in February, outperforming developed markets (DM) for the first calendar month since September 2023. A rally in China, the best-performing market over the month, supported gains; but will it last? (slide 5). 
• EM continues to lag DM YTD, with 2023 performance trends continuing; momentum is the best-performing factor. DM performance underpinned by the US, while China remains a drag on EM YTD, despite the recent rally. (slide 10)
• EM equity valuations are close to the historical median on 12-month forward price-earnings (P/E) and a price-book (P/B) measure, and outright cheap on dividend yield (slides 18, 23 and 25). 
• EM is cheap versus developed markets (DM). On a 12m forward P/E basis, the discount is close to the largest seen over the last 20 years (slide 26).
• On a standardised composite valuation measure most EM markets ex India, and on certain measures South Korea, are cheap versus their own history (slide 39).
• 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 (slides 46 and 47). 

Most of EM is cheap but the degree varies

EM valuation heatmaps – current z-scores¹

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, LSEG Datastream, MSCI, IBES, Schroders Strategic Research Unit. Data as at 29 February 2024.

Summary of emerging market debt:

After strong performance in 2023, emerging market (EM) bonds have posted mixed performance so far this year. Continued strength in the US economy has seen Federal Reserve (Fed) rate cut expectations scaled down, and US bond yields have ticked higher. This backdrop has been supportive of the US dollar.

Hard currency emerging market debt (EMD):

– Hard currency sovereign bonds are flat year-to-date while corporates have posted a positive return. These figures mask some divergent performance between the high yield (HY) and investment grade (IG) sub-sectors (slides 4-5).

– The hard currency sovereign spread is in line with the historical median, but there is a contrast between the IG and HY sub-index spreads (slide 10).

– In corporate EMD, both the IG and HY corporate spreads are firmly below their historical median (slide 16).

Local currency EMD:

– The average real yield premium of EM over DM has moved up from long term lows. Both the average EM and DM real yields have lifted, with EM well into positive territory again; the average DM real yield is still negative (slide 33).

– The average local EM ex Turkey yield curve is now upward sloping (slide 32).

– There are undervalued currencies in all three EM regions (slide 38), but the degree of value varies significantly.

EMD headline valuations

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

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

Source: Schroders, LSEG Datastream, J.P. Morgan. Data as at 29 February 2024. Percentiles shows where the current spread is relative 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

Net credit rating changes have turned positive

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

Weighted by number of issuers, not size of issuer.

Source: Schroders, Bloomberg. Data as at 29 February 2024.