Schroders Emerging Markets Lens August 2023: your go-to guide to emerging markets
Our monthly analysis highlights the charts and data that matter to emerging market investors.
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:
Summary of emerging market equities:
- EM equities rallied by more than 6% in July, outperforming DM (+3%) for the first month since January.
- Optimism towards a peak in global monetary policy tightening, and China stimulus, proved supportive; even if the scale of support remains unclear. Read more:
- EM equities are valued slightly above the historical median on a forward price-earnings basis. The price-book ratio is close to its historical median, while EM is cheap versus history on a dividend yield basis (slides 11, 15 and 16)
- There remains considerable variability between sector valuations (slide 13). 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 (slide 17)
- On a regional basis, Latin America remains cheap on a forward price-earnings basis. Valuations in EMEA and EM Asia are above their historical average (slide 20)
- 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
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 July 2023.
Summary of emerging market debt:
Hard currency emerging market debt (EMD):
- The hard EM bond index yield and spread is elevated relative to its long term history (slide 8)
- 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, both the IG spread, and to a lesser extent HY spread, have fallen below their historical median (slide 14)
Hard currency valuations are cheapest versus history, but there is more to this than meets the eye…
Spread percentiles: Spreads of key EMD indices (basis points)
Source: Schroders, Refinitiv Datastream, J.P. Morgan. Data as at 31 July 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.
Local currency EMD:
- The real yield pickup over developed market (DM) bonds has fallen to a very low level (slide 30). 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 close to flat (slide 29)
- There are undervalued currencies in all three EM regions (slide 35), but the degree of value varies significantl
Real exchange rate: deviation from average
Source: Schroders, Refinitiv Datastream. Data as at 31 July 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.