In focus

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


We are pleased to introduce a new publication called 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.

For those familiar with the Schroders Credit Lens and Equity Lens, the concept is similar. 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:

Summary of emerging market equities:

  • EM equities have underperformed developed market (DM) equities so far in 2021. China accounts for the bulk of this underperformance. Some EM, mostly in EMEA (Europe, Middle East and Africa), are up more than 20% in 2021 so far.
  • EM equities are not cheap, with valuation multiples above their historical medians. However: 1) the composition of the MSCI EM index has changed over time, complicating historical comparison, 2) valuations could be at least sustained if EM earnings growth and profitability continue to improve
  • There is considerable variability between the valuations of sectors in EM. Growth sectors are far more expensive than value sectors
  • EM equities’ valuation discount to DM equities has increased but is not extremely large, especially on a sector neutral basis. Without an improvement in EM earnings and profitability versus DM, it will be hard for this discount to narrow
  • The Covid-19 pandemic has opened up a gap in regional EM valuations, with Asia being the most expensive region, though not as much as it was, as stock prices in high price-earnings (P/E) sectors in Asia have fallen sharply this year
  • Latin America is the cheapest region, driven by a marked increase in earnings expectations in the materials and energy sectors. 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 value is appearing, although the extent varies significantly. Currencies in Latin America are the most undervalued

Summary of emerging market debt:

Hard currency emerging market debt (EMD):

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

Local currency EMD:

  • Yields increased in 2021 because of EM rate hikes and a pickup in inflation
    • the key question is how persistent the increase in core inflation will be in high inflation countries
  • It offers a large real yield premium over developed market (DM) bonds, partly because soaring US inflation has depressed real yields in DM
    • Historically, this has led to strong performance of EM local currency bonds
  • There are undervalued EM 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