GMO's Valuation Metrics in Emerging Debt: 2Q24

By the Emerging Country Debt Team

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Jul 19, 2024
Summary
  • In GMO's latest Quarterly Valuation Update, we offer our Q2 assessment: Local currency rates and FX screen attractive while credit is neutral.
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Local currency rates and FX screen attractive, while credit is neutral. In our Quarterly Valuation Update, we provide our Q2 assessment.

Hard currency debt valuations:

Credit Spreads: Neutral +

  • The current excess spread of 167 bps is in our second quintile of attractiveness, though very close to the third quintile.
  • Historically, an excess spread in this quintile has been associated with a subsequent 2 year annualized credit return of 0.6% (above the risk-free rate). As a reference, the third quintile's mean return has been +4.0%.

USD Rates: Neutral

  • The forward curve remains inverted, although less than last quarter.
  • 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.

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 0.7%, this is in our most attractive fourth quartile, where the mean subsequent EM/U.S. return differential has been +1.8%.

Disclosures

I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure