In focus

Schroders Emerging Markets Lens Q1 2022: your go-to guide to emerging markets

We are pleased to introduce the Q1 edition of the Schroders Emerging Markets Lens. It 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. Please note that the EM debt presentation is split into sections on hard currency debt, local currency debt, and currencies.

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 underperformed developed market (DM) equities by 24% in 2021. China accounts for the bulk of this underperformance. Some EMs, mostly in EMEA1, were up by more than 20% in 2021
  • EM equities are not cheap in aggregate, with valuation multiples above their historical medians. However: 1) the composition of the EM index has changed over time, complicating historical comparison, 2) attractiveness of valuations is dependent on the path of EM earnings and profitability
  • There remains a considerable variability between the valuations of sectors in EM. Growth sectors are far more expensive than value sectors
  • EM equites’ valuation discount to DM equities has increased but is not extremely large, especially on a sector neutral basis. EM IT sector accounts for the bulk of this discount
  • Asia is the most expensive EM region, though not as much as it was earlier in 2021, as stock prices in high P/E sectors have fallen. Importantly, China’s forward P/E has contracted from 17x to 12x
  • Latin America is the cheapest region, driven by the combination of higher earnings expectations and lower stock prices. In EMEA, some countries are very cheap, while others have more neutral valuations
  • The 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

Summary of emerging market debt:

Hard currency emerging market debt (EMD):

  • Valuations vary
    1. Investment grade (IG) sovereign and corporate spreads are well below historical medians
    2. High yield (HY) spreads offer more value, especially in sovereign EMD where the dispersion between countries has increased

Local currency EMD:

  • Yields have increased in 2021 because of EM rate hikes and a pickup in inflation
    • The key question is if inflation will start to cool in 2022 on the back of EM rate hikes
  • Offer a very large real yield premium over developed market (DM) bonds
  • Historically, this has led to strong performance of EM local currency bonds
  • 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
  • Most EM current accounts swung from deficit to surplus in the pandemic, reducing vulnerability to sharp currency depreciation