Schroders Emerging Markets Lens August 2024: your go-to guide to emerging markets
How have EM assets been performing amid the recent volatility, and how have valuations evolved?
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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
Summary of emerging market equities:
- Emerging market (EM) equities have not escaped the global market volatility in August but remain positive YTD. More cyclical EM, those with high IT sector weight or carry-trade exposure have been under pressure (slides 4-9).
- MSCI EM has returned 5% YTD, underperforming developed markets (DM), which are up 9% as at 7 August. Latin America lags by a wide margin, while EM Asia leads, though this masks a wide range of market returns (slide 18).
- Index performance has been concentrated YTD. This trend has reversed slightly in early August, but momentum remains the best-performing factor YTD (slides 20-21).
- EM valuations had not re-rated in the same vein as the US since the end of 2022 and were not extended versus history (slide 10). Most EM are cheap versus their own history, meanwhile the valuation gap to DM remains close to its widest level in 20 years (slides 31-32).
- Consensus expectations are for EM earnings growth to be 22% and 16% YoY for 2024 and 2025 respectively; for 2024 the figure is double that of the US (slide 36).
Summary of emerging market debt:
EM bonds have been relatively resilient amid the global market volatility in early August. Hard currency HY spreads have widened, and some EM FX pressured by carry-trade unwind, though markets are rebounding. On a year-to-date basis, as at 7 August, hard currency debt continues to outperform, whilst local debt lags due to currency weakness.
Hard currency emerging market debt (EMD):
- YTD the high yield (HY) sub-sector continues to outperform the investment grade (IG) sub-sector (slide 7).
- The HY index spread is above its historical median. The IG sub-index spread has picked up recently but remains below its historical median. This is linked to compositional change (slides 12-13).
- EM corporate spreads remain below the historical median, despite a pickup in the past month to 7 August (slide 20).
Local currency EMD:
- The average real yield premium of EM over DM has continued to rise from long-term lows. (slides 38-39).
- The average local EM ex Turkey yield curve is upward sloping (slide 37).
- There are undervalued currencies in all three EM regions (slide 42), but the degree of value varies significantly.
Chart of the month:
What to watch: will prospective US rate cuts and the twin-deficits trigger a reversal in over a decade of dollar strength?
Source: LSEG Datastream, MSCI, Schroders Strategic Research Unit, as at 7 August 2024. All returns rates shown in USD terms. Past performance is not a guide to future performance and may not be repeated.
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