GMO's Valuation Metrics in Emerging Debt: 2Q24
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%.
This article first appeared on GuruFocus.