Schroders Emerging Markets Lens Q3 2022: your go-to guide to emerging markets
The charts and data that matter for emerging markets investors this quarter.
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We are pleased to introduce the Q3 edition of 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.
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:
Emerging Markets Lens: Emerging Market Debt
Summary of emerging market equities:
- After weathering the initial impact from Russia’s invasion of Ukraine, emerging market (EM) equities have been under pressure over recent months
- Latin American and Middle Eastern markets have been the top performers. Eastern European markets are sharply lower, while South Korea and Taiwan also lag the index.
- EM equities as a whole have become slightly undervalued, with the EM index forward P/E and dividend yield just below the historical median
- There remains considerable variability between sector valuations in EM. Growth sectors, despite the recent correction in prices, are much more expensive than value sectors
- EM equites are cheaper than developed market (DM) equities, but the difference is not extremely large, especially on a sector neutral basis
- Valuations in Asia have become more attractive in some countries. Because of the exclusion of historically cheap Russian market from the index, EMEA does not look extremely cheap anymore. Latin American remains the cheapest region
- The decade of US dollar appreciation has weighed on EM equity returns. Most EM currencies have depreciated in real terms, implying emerging value, although the extent varies significantly
Summary of emerging market debt:
Hard currency emerging market debt (EMD):
- Valuations vary:
- The spreads of investment grade (IG) sovereign and IG corporate indices are close to their historical medians. High yield (HY) corporate index spreads have inched slightly above the historical median.
- The spread of the HY sovereign index is well above the historical median, as a number of smaller countries are hit by rising commodity prices
Local currency EMD:
- Local currency EM bond yields have increased in 2022
- The key question is what impact the commodity price shock will have on inflation
- Offer a sizeable real yield premium over developed market (DM) bonds
- Historically, this has led to strong performance of EM local currency bonds
- There are undervalued currencies in all three EM regions. On average, Latin American currencies are the cheapest, whereas Asian currencies have the least appealing value
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