Schroders Emerging Markets Lens January 2023: your go-to guide to emerging markets – Financial Professionals
Our latest edition of Schroders Emerging Markets Lens is now available.
This consists of separate Emerging Markets (EM) equity and debt chart books/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 a main focus on EM valuations.
Below is an overview of the most important developments in the equity and debt markets, and you can find links to both presentations here:
Emerging Markets Lens: Emerging Market Debt
Overview of shares in emerging markets:
- Emerging Markets (EM) stocks fell -20% in US dollar terms in 2022, the weakest calendar-year performance since 2008. EMEA was the weakest region, while various Asian EMs, including China, lagged the index. Conversely, commodity-producing Latin American and Middle Eastern markets fared better.
- Following the Q4 rally and downward revisions to 2023 earnings expectations, EM stocks as a whole have moved close to the historical median on a forward-earnings and book-to-book basis. On a dividend basis, EC remains cheap relative to history.
- There is still considerable variation between sector assessments in EM. Various growth sectors remain much more expensive than value sectors.
- EM stocks are cheaper than developed market (DM) stocks, but the difference is not very large, especially on a sector-neutral basis.
- On a regional basis, Latin America remains the cheapest. Valuations in Asia have become more attractive in some markets.
- A decade of rising US dollar has weighed on returns on EM stocks. Most EM currencies have depreciated in real terms, meaning emerging value, although the extent varies considerably.
Average (Trailing P/E, P/E, P/B, Dividend Yield) (z-score)
Excludes UAE, Qatar, Saudi Arabia and Kuwait due to limited data history. The Z-score is a measure of how far the valuations are from the historical average, calculated since January 2000.
Source: Schroders, Refinitiv Datastream, MSCI, IBES, Schroder’s strategic research unit. Data per 31 December 2022.
Summary of emerging markets debt:
The macroeconomic background, and regime change, created a challenging environment for EM assets in 2022. Slow economic growth, accelerating inflation, exacerbated by Russia’s invasion of Ukraine and tighter global financial conditions were all headwinds. Both local and dollar debt in EM experienced record fund outflows during the year.
Hard currency Emerging Market Debt (EMD):
- The yield on the hard currency EMD index increased by 3.3% to 8.6% in 2022.
- However, spreads for the government and investment grade (IG) corporate indices are now below their historical medians.
- The spread of the HY sovereign index is still elevated despite a recent decline. Conversely, the high yield (HY) corporate index spread is slightly below its historical median.
Local currency ECtHR:
- The yield of the EM index in local currency increased by 1.1% to 6.9% in 2022.
- However, real yields against developed market (DM) bonds collapsed towards the lower end of their post-GFC range. This is primarily due to the sharp fall in EM real interest rates this year, as inflation has risen more than nominal interest rates.
- There are underrated currencies in all three EC regions. The degree of value in EM currencies varies considerably.
Real exchange rate: deviation from the average
Source: Schroders, Refinitiv Datastream. Data per 31 December 2021. Real rate is the nominal dollar rate deflated by the consumer price index (CPI) for each EM country vs. USA. Long-term average is since January 1995.