Schroders Emerging Markets Lens May 2024: your go-to guide to emerging markets
Emerging market equities have picked up recently, aided by a rally in China. The going has been tougher for EM debt. We assess the latest 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:
- EM equities posted a slight gain (+0.5%) in April, supported by a rally in China, and outperformed developed markets (-3.7%) by the widest monthly margin since November 2022.
- China is now ahead of EM YTD, having rallied almost 20% since 19 January (slide 13). Read more: Should investors adapt their approach to investing in Chinese equities?
- Consensus expectations are for EM earnings to be 20% and 15% for 2024 and 2025 respectively; these are ahead of other major markets (slide 6).
- Some leading indicators have been softer, but continue to point to a pickup in the global goods cycle which should be supportive of EM manufacturers (slide 7).
- EM equity valuations are attractive on various levels. The discount to DM is close to the largest seen over the last 20 years on a 12-month forward P/E basis. On a standardised composite valuation measure most EM markets ex India are cheap versus their own history (slides 18-24). Read more: What’s behind India’s post-Covid outperformance, and is it set to continue?
EM earnings growth projected to be strongest globally over next few years
Consensus growth forecasts vs. other markets, % (USD)
Past performance is not a guide to future performance and may not be repeated.
Source: LSEG Datastream, MSCI, IBES, Schroders Strategic Research Unit, as at 30 April 2024. All returns and growth rates shown in USD terms.
Most of EM is cheap but the degree varies
EM valuation heatmaps – current z-scores¹
¹The z-score is a measure of how far valuations are from historical mean, calculated since January 2000. Excludes UAE, Qatar, Saudi Arabia and Kuwait due to limited data history. Combined figure is an average of trailing P/E, 12-month forward P/E, P/B, and dividend yield. Source: Schroders, LSEG Datastream, MSCI, IBES, Schroders Strategic Research Unit. Data as at 30 April 2024.
Summary of emerging market debt:
Emerging market (EM) bonds have been under pressure, negatively impacted by rising US Treasury yields, and heightened geopolitical tensions, notably from the conflict in the Middle East. Hard currency corporate debt has delivered a positive return year-to-date, but hard currency sovereign is close to flat, and local EM debt firmly down.
Hard currency emerging market debt (EMD):
- YTD hard currency performance is close to flat. However, underlying the headline return is divergent performance between the high yield (HY) and investment grade (IG) sub-sectors (slides 4-5).
- The IG sub-index spread has continued to fall and is well below the historical median. The spread on the HY index moved higher in April and is now above its historical median (slide 10).
- In corporate EMD, both the IG and HY corporate spreads are firmly below their historical median (slide 16).
Local currency EMD:
- The average real yield premium of EM over DM is off its long-term lows. The average EM and DM real yields have both increased, with EM firmly positive again; the average DM real yield is still negative. (slides 33-34).
- The average local EM ex Turkey yield curve is upward sloping (slide 33).
- There are undervalued currencies in all three EM regions (slide 38), but the degree of value varies significantly.HC sovereign, year-to-date total return (USD)
Divergent performance of investment grade and high yield within hard currency index
HC sovereign, year-to-date total return (USD)
Past performance is not a guide to future performance and may not be repeated.
Source: Schroders, LSEG Datastream, JP Morgan, Schroders Strategic Research Unit. Data as at 30 April 2024.
EMD headline valuations: hard currency cheapest vs. history but there is more to this story…
Past performance is not a guide to future performance and may not be repeated.
Source: Schroders, LSEG Datastream, J.P. Morgan. Data as at 30 April 2024. Hard EMD =stripped spread, Local EMD =Spread to 5 year UST, Corporate EMD = spread to worst.
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