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Schroders Emerging Markets Lens November 2022: your go-to guide to emerging markets


Our latest edition of the Schroders Emerging Markets Lens is now available. 

This 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.

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: Equity

Emerging Markets Lens: Emerging Market Debt

Summary of emerging market equities:

  • Emerging market (EM) equities fell -3% in October, underperforming developed markets (DM) by 10%. However, this was primarily due to weakness in China and Taiwan.
  • Chinese equities corrected as the 20th National People’s Congress reinforced President Xi’s authority and did not indicate any near term end to the Zero-Covid policy. New US export controls on semiconductor manufacturers, which will restrict Chinese companies access to advanced chips, also weighed on sentiment.
  • Year-to-date, commodity-producing Latin American and Middle Eastern markets have been the top performers. China is the weakest index market while several Eastern European markets are also sharply lower.
  • EM equities as a whole are undervalued on both a forward price-earnings and price-book basis when compared with the historical median. On a dividend yield basis, EM has reached a post-GFC high. Aggregate earnings expectations have continued to fall though, with further downside likely in the coming months. 
  • There remains considerable variability between sector valuations in EM. Growth sectors in general remain 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 markets. Latin America remains the cheapest region.
  • A 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.

Standardised EM country valuations: Combined

Average (P/E, P/B, dividend yield) (z-score1)

EMequityvaluations.png

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.

Source: Schroders, Refinitiv Datastream, MSCI, IBES, Schroders Strategic Research Unit. Data as at 31 October  2022.

Summary of emerging market debt:

Hard currency emerging market debt (EMD):

  • The hard currency sovereign EMD index yield hit 9.7% at the end of October and remains at its highest level since the GFC. This has been driven by a combination of higher credit spreads and higher treasury yields.
  • The spreads of the investment grade (IG) sovereign and IG corporate indices are close to their historical median.
  • The spread of the HY sovereign index is still close to its GFC peak. The high yield (HY) corporate index spread is also elevated. 

Local currency EMD:

  • The local currency EM index yield has increased markedly in 2022, reaching 7.4% at the end of October.
    • But the real yield pickup over developed market (DM) bonds has collapsed towards the bottom end of its post-GFC range. This is because of the sharp decrease in EM real yields this year, as inflation has increased by more than nominal yields.
    • 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.

Local currency EMD index yield

GBIEMINDEXyield.png

Source: Schroders, Refinitiv Datastream. Data as at 4 November 2022. Russia was removed from all JP Morgan EMD indices from 31 March 2022.