Executive Summary
- Emerging currency valuation differentials narrowed in the third quarter 2017 according to our methodology. The rally in the EUR improved EM relative valuations against the EUR, but the weakness in the USD further narrowed the valuation differential between the dollar and EM currencies. EM currencies still look cheap relative to the USD, but less so than at the beginning of the year, and the end of the second quarter.
- Local debt markets continue to look attractive, based on real yield differentials between EM and developed market bonds. Differentials remain well above historical norms, despite the rally in nominal rates in emerging countries over the past quarter.
- External debt remained in “rich” territory in the third quarter, but the broad stabilization in credit ratings and credit spreads during the quarter meant that the asset class maintained its valuation metrics (it did not get richer). Spread compression was offset by strong credit rating momentum.
- Finally, it is worth noting that, at the beginning of the year, our valuation methodology suggested local emerging debt markets were significantly more attractive than hard currency debt markets. For the year-to-date through September 30 2017, the GBI-EMGD local benchmark is up 14.28%, while the EMBIG hard currency benchmark is up 8.73%.
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