Quarterly EM Debt Update | January 22, 2024

Valuation Metrics in Emerging Debt: 4Q23

Our emerging market debt valuation metrics across all but the U.S. interest rate dimension remain unambiguously attractive. In our Quarterly Valuation Update, we provide our Q4 assessment.

Hard currency debt valuations:

  • Credit Spreads: Attractive
    • The current credit multiple of 2.7 is in our third quintile of attractiveness, which is positive, although close to the second quintile. 
    • Historically, a credit multiple in this quintile has been associated with a subsequent 2-year annualized credit return of 4.5% (above the risk-free rate). As a reference, the second quintile's mean return has been +0.3%.
  • USD Rates: Neutral
    • The forward curve remains inverted. 
    • We find this pricing somewhat ambiguous in generating a clear outlook, so we remain neutral.

Local currency debt valuations:

  • FX: Attractive
    • Our expected spot return indicator lands in the attractive third quartile.
    • Mean subsequent GBI-EMGD weighted spot returns have been +5.5% for the third quartile, and +1.4% for the second quartile.
  • EM local rates: Very Attractive
    • EM local 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 0.50%, this is in our most attractive fourth quartile, where the mean subsequent EM/U.S. return differential has been +1.4%.

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