After a February in which emerging markets’ strong start to the year lost steam, our monthly analysis highlights the charts and data that matter to 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:
Emerging Markets Lens: Emerging Market Debt
The strong start to 2023 for emerging market (EM) equities faded in February. The China re-opening rally lost steam, and was exacerbated by re-escalation in US-China tensions. Meanwhile, more resilient US macroeconomic data raised the prospect of further rate rises. Against this backdrop the US dollar strengthened, which was a headwind for EM.
Despite recent performance, valuations are little changed, as earnings expectations have also fallen. EM equities are above the historical median on a forward P/E basis, albeit not significantly so. The price-book ratio is close to its historical median, while EM remains cheap versus history on a dividend yield basis.
There remains considerable variability between sector valuations in EM. 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 Asia and EMEA are above their historical median.
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.
Average valuations (z-score*)
Average of trailing price-earnings, 12-month forward price-earnings, price-book, and dividend yield z-scores. Excludes UAE, Qatar, Saudi Arabia and Kuwait due to limited data history. *The 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 January 2023.
EM debt came under pressure in February and yields moved higher. More resilient than expected macroeconomic data in the US raised the prospect of further Federal Reserve rate rises, and the US dollar appreciated.
Hard currency emerging market debt (EMD):
The hard currency sovereign EMD index yield increased in Feb, and remains elevated relative to its long term history. This is entirely down 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, both the IG and HY spreads are now at below average levels.
Local currency EMD:
Local EM bonds gave back a large portion of YTD gains in February, with currency weakness the largest drag.
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.
There are undervalued currencies in all three EM regions. The degree of value in EM currencies varies significantly.
Hard currency sovereign EMD regional index yield
Russia was removed from all JP Morgan EMD indices from 31 March 2022. Source: Schroders, JP Morgan. Data as at 28 February 2023.
The presentations can be found in full here:
Emerging Markets Lens: Emerging Market Debt
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