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

Our monthly analysis highlights the charts and data that matter to emerging market investors.

13/06/2023
Istanbul

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

Summary of emerging market equities:

  • EM equities continue to struggle versus developed markets (EM) year-to-date, with weakness in China a drag. However, this masks a wide range in country returns.
  • EM equities are close to the historical median on a forward price-earnings basis. The price-book ratio is slightly below its historical median, while EM is cheap versus history on a dividend yield basis.
  • There remains considerable variability between sector valuations. Various growth sectors remain much more expensive than value sectors.
  • EM equities are cheaper than developed market (DM) equities, but the difference is not extremely large, especially on a sector neutral basis.
  • On a regional basis, Latin America remains cheap on a forward price-earnings basis. Valuations in EMEA are close to their historical median while EM Asia is slightly expensive.
  • 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
  • New research: Globalisation reset: which economies stand to benefit - a long-term theme with potentially significant impact on EM.

Average (trailing P/E, P/E, P/B, dividend yield) (z-score1)

EMEquityvaluationsJune23

Excludes UAE, Qatar, Saudi Arabia and Kuwait due to limited data history. 1The z-score is a measure of how far valuations are from historical mean, calculated since January 2000. Source: Schroders, Refinitiv Datastream, MSCI, IBES, Schroders Strategic Research Unit. Data as at 31 May 2023.

Summary of emerging market debt:

Hard currency emerging market debt (EMD):

  • The hard currency EM bond index yield is elevated relative to its long term history.
  • This is due to the elevated spread on the high yield (HY) sovereign index. The spread on the investment grade (IG) sovereign market is below its historical average.
  • In the corporate market, the IG and HY spreads are relatively close to average levels.

Local currency EMD:

  • The real yield pickup over developed market (DM) bonds has fallen to a very low level. This is primarily due to the sharp decrease in EM real yields in the past 12 months, as inflation has increased by more than nominal yields. EM inflation is now falling though, and could provide some relief.
  • The average local EM yield curve is now inverted (downward sloping)
  • There are undervalued currencies in all three EM regions. The degree of value in EM currencies varies significantly.

Real exchange rate: deviation from average

EMDFXvaluation

Source: Schroders, Refinitiv Datastream. Data as at 31 May 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.

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Authors

Andrew Rymer, CFA
Senior Strategist, Strategic Research Unit

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