Executive Summary
- Emerging currency valuation differentials narrowed further in the fourth 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 now look neutral relative to the USD, for the first time in several years.
- Local debt markets continue to look attractive, based on real yield differentials between EM and developed market bonds. Differentials remain above historical norms.
- External sovereign debt remained in “rich” territory in the fourth quarter, but the broad improvement in credit ratings during the quarter meant that the asset class valuation marginally improved on our metrics (it became “less rich” on a risk-adjusted basis).
- Finally, it is worth noting that, at the beginning of 2017, our valuation methodology suggested local emerging debt markets were significantly more attractive than hard currency debt markets. For the full year 2017, the GBI-EMGD local benchmark returned 15.21%, while the EMBIG hard currency benchmark was up 9.32%.
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