Schroders Emerging Markets Lens November 2024: your go-to guide to emerging markets
How have EM assets responded to the US election results, and what is the picture for 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:
- Emerging market (EM) equities fell -4% in October and underperformed DM (-2%). Among the large markets, South Korea, India, and China, all lagged; Taiwan was the only index market to advance.
- As US opinion polls moved in favour of Donald Trump, markets began to price a more reflationary policy outlook. US bond yields rose and the US dollar strengthened, which was a headwind to EM assets. Read more: What impact will the US election have on emerging markets?
- EM has returned 11% YTD as at 12 November. This lags DM, which is up 21%, but DM is underpinned by the US and EM is modestly ahead of other major DM (slide 6).
- Initial EM reaction to the US election was negative, but not to the extent after Trump’s 2016 win, given some degree of anticipation (slide 5), but tariffs pose a risk. Read more: 2024 US election outcome: implications for investors
- The impact of Trump 1.0 on EM equities: after the initial post 2016 election sell-off, EM outperformed DM before US tax cuts and the trade war with China led to renewed US dollar strength and EM subsequently lagged (Slide 7).
- Headline EM valuations have picked up but are not significantly extended versus history. Larger markets continue to skew the aggregate somewhat, and many EM are cheap versus their own history. (Slides 20-28)
- The EM valuation gap to DM is at its widest level in 20 years on a 12-month forward price-earnings basis, even after adjusting for sector weights (slides 26-27). The valuation gap to the US is -44% and notably higher vs 2016 (slide 9).
Summary of emerging market debt:
EM bonds and currencies, notably local debt, came under pressure in October as opinion polls moved in favour of Trump. This led to a rise in US Treasury yields and dollar strength, which was a headwind for EM assets. YTD, hard currency debt continues to outperform local EM.
Hard currency emerging market debt (EMD):
- The high yield (HY) sub-index (+12.6%) comfortably leads YTD as at 12 November; the investment grade (IG) sub-index (+2.0%) has also generated a solid gain.
- The hard currency index spread has tightened this year and is slightly below its historical median, amid narrowing in both IG and HY spreads (slide 18).
- The IG sub-index spread is close to its lowest level since 2007, while HY is slightly cheap vs history. Both IG and HY EM corporate spreads remain below the historical median (slide 19).
Local currency EMD:
- The average real yield premium of EM over DM has continued to trend higher YTD (slides 41-42).
- The average local EM ex Turkey yield curve is upward sloping (slide 40).
Chart of the month: EM equities
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