GMO Commentary- Valuation Metrics in Emerging Debt: 1Q24

Local currency rates and FX continue to screen attractive, as credit spreads transition to neutral.

As we look ahead to our Emerging Country Debt Strategy's 30-year anniversary on April 19th, our team paused to reflect on how important our valuation metrics have been in discussions with our clients. We have published our Valuation Update regularly for the past decade, and we look forward to continuing to share our views in the years ahead.

Hard currency debt valuations:

• Credit Spreads: Neutral

  • The current credit multiple of 2.5 is in our second quintile of attractiveness.

  • Historically, a credit multiple in this quintile has been associated with a subsequent 2 year annualized credit return of 0.3% (above the risk-free rate). As a reference, the third quintile's mean return has been +4.5%.

• 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.

• Local Rates: Very 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.

This article first appeared on GuruFocus.