Schroders Emerging Markets Lens February 2025: your go-to guide to emerging markets
Trade tariffs spell uncertainty. Which EM might be at risk, how have markets responded, and where are valuations?
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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:
- YTD performance: emerging market (EM) equities (2%) made a positive start to 2025 but lagged developed markets (DM) which returned 4%. Various 2024 trends saw signs of reversal in January; the US dollar was slightly weaker over the month whilst Latin American equities led, and EM Asia lagged.
- Tariffs uncertainty: President Trump’s announcement of tariffs on Mexico, Canada and China, some of which were later delayed, led to some volatility in markets and currencies in early February. EM exposure to potential tariffs varies by economy and market but is a complex assessment (slides 5-7). Read more: Trump's on-off tariffs
- EM valuations: headline valuations are not significantly extended or cheap vs. history. However, India and Taiwan skew the aggregate, and a large number of individual EM are cheap versus their own history (slides 17-25).
- Relative valuation gap wide: the EM valuation gap to DM is close to its widest level in 20 years on a 12-month forward price-earnings basis. The valuation gap to the US is -46%, and markedly wider vs November 2016, when President Trump was first elected.
- What to watch: US policy announcements, and implications for the path of the US dollar. The prospect of further policy support in China. In geopolitics, the evolution of global trade relations - the potential for a broadening in US trade tariffs is an ongoing risk. As well as the conflicts in Ukraine and the Middle East.
Summary of emerging market debt:
Hard currency emerging market debt (EMD) made a positive start to 2025, amid some easing in US Treasury yields in January. Local EMD led, with currency appreciation versus the dollar supportive.
However, President Trump’s announcement of new US tariffs in markets including Mexico and China among others has led to renewed uncertainty.
Hard currency emerging market debt (EMD):
- HC sovereign EMD returned 1.4% and corporate 0.8% in January, led by the high yield (HY) sub-indices.
- HC spreads are below the historical median for sovereign and corporate HY and IG sub-indices; the most notable move in January was further tightening in sovereign HY spreads (slides 15 and 22).
- Trade risk: trade deficits are one factor President Trump has signalled as an issue; in an EM context, China, Mexico and Vietnam stand out (slides 8-9).
Local currency EMD:
- Local EMD returned 2.1% in January, with Latin American markets recording the strongest gains.
- The average real yield premium of EM over DM ticked down to 3.0% in January (slide 39).
- The average local EM ex Turkey yield curve is upward sloping (slide 38).
- There are EM currencies which appear undervalued in all three EM regions, though the degree varies significantly (slide 44).
Chart of the month:
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