Quarterly EM Debt Update | April 17, 2023

Valuation Metrics in Emerging Debt: 1Q 2023

Our emerging market debt valuation metrics across all but the U.S. interest rate dimension remain unambiguously attractive. In this new, compact version of our Quarterly Valuation Update, we provide our Q1 assessment and introduce summary valuation graphics to assist in quantifying expected returns.

Hard currency debt valuations:

  • EMBIG-D credit spreads widened by more than the expected losses. The current credit multiple of 3.5 is in our mid-quintile of attractiveness, which we consider quite good. This quintile has had a 5.5% median 2-year subsequent annualized credit return (above the risk-free rate).
  • With the Fed continuing to raise U.S. interest rates, Fed funds now yield more than 10-year swaps, and the forward curve continues to be inverted. The market is pricing 10-year rates to be 3.5% in three years' time, comfortably above the Fed's 2% inflation target but uncomfortably below the most recent 6.0% Y/Y February CPI and 4.6% Core PCE inflation figures. We find this pricing somewhat ambiguous in generating a clear outlook, so we remain neutral.

Local currency debt valuations:

  • In FX, our expected spot return indicator moved into our attractive valuation zone as cyclical factors joined longer-term valuation factors in support. At 0.9%, this is in our attractive third quartile, where median subsequent GBI-EMGD weighted spot returns have been 4.8%
  • EM local interest rates maintained an attractive valuation gap versus U.S. interest rates as inflation-related forecasts are falling faster in EM than in the U.S. At 0.7%, this is in our attractive third quartile, where median EM/U.S. return differentials have been 2.2%


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