Schroders Emerging Markets Lens Q2 2022: your go-to guide to emerging markets

We are pleased to introduce the Q2 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 have weathered the impact of Russia’s invasion of Ukraine relatively well
  • Latin American and Middle Eastern markets have been the top performers because of the tailwind of higher commodity prices. Eastern European markets are sharply lower. Chinese stocks rebounded sharply in March, but are still down for the year
  • EM index valuation is becoming neutral, with the forward P/E just above the historical median. EM dividend yield is already above the median, as EM dividends recover
  • There remains considerable variability between sector valuations in EM. Growth sectors, despite the recent correction in prices, are much more expensive than value sectors
  • EM equites are cheaper than DM equities, but the difference is not extremely large, especially on a sector neutral basis. The recent correction in the DM IT sector has reduce the discount
  • Valuations in Asia have fallen close to neutral. Because of the exclusion of historically cheap Russian market from the index, EMEA1 does not look extremely cheap anymore. Latin American stocks remain cheap despite recent gains
  • 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 are not overly attractive
    1. The spreads of investment grade (IG) sovereign and IG and high yield (HY) corporate indices are below their historical medians
    2. The spread of the HY sovereign index is above the historical median, as a number of smaller countries are hit by rising commodity prices

Local currency EMD:

  • Local currency EM bond yields have continued to increase in 2022
    • The key question is what impact the commodity price shock will have on inflation
  • Offer a 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

A number of EM currencies are benefitting from higher commodity prices