Schroders Emerging Markets Lens: Equity

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Strategic Research Unit

Summary 3

• The strong start to 2023 for emerging market (EM) equities faded in February. The China re-opening rally lost steam, and was exacerbated by re-escalation in US-China tensions. Meanwhile, more resilient US macroeconomic data raised the prospect of further rate rises. Against this backdrop the US dollar strengthened, which was a headwind for EM.
• Despite recent performance, valuations are little changed, as earnings expectations have also fallen. EM equities are above the historical median on a forward P/E basis, albeit not significantly so. The price-book ratio is close to its historical median, while EM remains cheap versus history on a dividend yield basis.
• There remains considerable variability between sector valuations in EM. Various growth sectors remain much more expensive than value sectors.
• EM equities are cheaper than developed market (DM) equities, but the difference is not extremely large, especially on a sector neutral basis.
• On a regional basis, Latin America remains cheap on a forward price-earnings basis. Valuations in Asia and EMEA are above their historical median.
• 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.