Schroders Emerging Markets Lens December 2022: your go-to guide to emerging markets

Our latest edition of the Schroders Emerging Markets Lens is now available.

This consists of separate emerging market (EM) equity and debt chartbooks/presentations, packed full of data and insights to help you navigate the world of emerging markets. The aim here is to provide an unbiased top-down view of markets, with the main focus on EM valuations.

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 returned 15% in November, outperforming developed markets (DM) by 8%. This was led by a 30% rally in China, the fourth largest monthly gain on record for the MSCI China Index.
• Year-to-date, EMEA markets have taken a hit, while several Asian EM, including China, lag the index. Conversely, commodity-producing Latin American and Middle Eastern markets have been the top performers.
• After the recent rally, and downward revisions to 2023 earnings expectations, EM equities as a whole have moved close to the historical median on a forward price-earnings and price-book basis. On a dividend yield basis, EM remains cheap versus history.
• There remains considerable variability between sector valuations in EM. Growth sectors in general 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.
• Valuations in Asia have become more attractive in some markets. Latin America remains the cheapest region.
• 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 (trailing P/E, P/E, P/B, dividend yield) (z-score 1)

_{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 30 November 2022.}

Summary of emerging market debt:

Hard currency emerging market debt (EMD):

• Despite a -1.2% fall in November, the hard currency sovereign EMD index yield remains elevated. This year’s rise in yields has been driven by a combination of higher credit spreads and higher treasury yields.
• The spread of the investment grade (IG) sovereign index is now below its historical median while the IG corporate index is close to its median.
• The spread of the HY sovereign index is still elevated, despite declining in the past month. The high yield (HY) corporate index spread has moved close to its historical median.

Local currency EMD:

• The local currency EM index yield fell by -0.6% in November, but is still up 1.1% YTD, as at 5 December.
• However, the real yield pickup over developed market (DM) bonds has collapsed towards the bottom end of its post-GFC range. This is because of the sharp decrease in EM real yields this year, as inflation has increased by more than nominal yields.
• There are undervalued currencies in all three EM regions. On average, Latin American currencies are the cheapest, whereas Asian currencies have the least appealing value.

Real exchange rate: deviation from average

_{Source: Schroders, Refinitiv Datastream. Data as at 30 November 2021. 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.}