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

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



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:

  • Emerging market (EM) equities fell 6% in August, underperforming developed markets (-2%) by a wide margin.
  • Further resilience in the US economy suggested that that the Fed may keep rates high for longer. With yields picking up, risk appetite waned, while weak Chinese macroeconomic data weighed on the local market. There was some overspill to other EM. Read more: Has China finally slid into a debt/deflation spiral?
  • EM now lags DM by some distance YTD. However, EM small caps have performed in line with DM (slide 6). The EM Value Index is also ahead of the standard EM Index YTD; this stands in contrast to DM factor performance (slide 7).
  • EM equities are close to the historical median on a 12-month forward price-earnings and a price-book basis. EM is cheap versus history on a dividend yield basis (slides 13, 17 and 18)
  • There is considerable variability between sector valuations (slide 15). Various growth sectors are 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 (slide 19)
  • 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


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 August 2023. 

Summary of emerging market debt:

Emerging market (EM) bonds fell in August as upward pressure in developed market (DM) bond yields resumed. Weakness in China’s economy weighed on sentiment more broadly towards EM bonds. A stronger US dollar was a drag for local debt. Despite recent performance, EM bonds remain positive YTD, led by local bonds (slide 4).

Hard currency emerging market debt (EMD):

  • The hard EM bond index yield and spread are elevated relative to their long term history (slides 8-9)
  • The above-median hard EMD spread is attributable to the high yield (HY) sovereign index. The spread on the investment grade (IG) sovereign market is below its historical average, and at a more than ten year low (slide 9)
  • In corporate EMD, the IG and HY corporate spreads are slightly below their historical median (slide 14) 

Local currency EMD:

  • The real yield premium of EM over DM is close to the bottom-end of its post-GFC range (slide 30), but has started to pick up. This is primarily due to rising EM real yields over the past few months, as EM inflation has moderated.
  • The average local EM yield curve is now close to flat (slide 29)
  • There are undervalued currencies in all three EM regions (slide 35), but the degree of value varies significantly

Source: Schroders, Refinitiv Datastream. Data as at 31 August 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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Andrew Rymer, CFA
Senior Strategist, Strategic Research Unit


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