Valuation Metrics In Emerging Debt: 4Q 2022

Fourth quarter 2022 returns reflected a partial recovery from the deterioration of global economic and market conditions of the previous three quarters:

  • Hard Currency Debt EMBIG-D returned +8.1%: 7.6% from tightening spreads and 0.5% from USD rates.
  • Local Debt GBI-EMGD returned +8.5%: +5.5% from currency and +3.0% from local rates.

Valuation metrics across all but the U.S. interest rate dimension remain unambiguously attractive.

  • Hard currency debt valuations Although our credit multiple metric compressed over the quarter, it remains firmly in our attractive zone. U.S. dollar interest rates are a tougher call, with short-end rates high relative to the Fed’s inflation target yet low relative to delivered inflation; meanwhile, the curve is inverted with the 10y vs. 2y slope at –0.76 (as of Jan 12th).
  • Emerging Currencies have gained in attractiveness as cyclical factors join valuation factors in support.
  • Local interest rate continue to point to attractive levels relative to U.S. dollar interest rates.

In this piece, we update our valuation charts and commentary, with additional details on our methodology available upon request.

External Debt Valuation

The EMBIG-D benchmark’s mid-spread over Treasuries tightened by 107 bps in Q4, ending the quarter at 463 bps. As seen in Exhibit 1, the fair market multiple is the benchmark’s credit spread to the spread that would be required to compensate for credit losses. This ratio fell considerably over the quarter. The multiple stood at 3.3 on December 30, 2022, down from 4.3 on September 30, 2022.


QVU metrics are designed to give asset allocators a time series of risk premia associated with the two sovereign emerging debt benchmarks for hard and local currency. The purpose is to help allocators time investing decisions. Our team uses them to create blended benchmark portfolios. We cover the pricing of credit in EMBIG-D; and currencies and rates in GBI-EMGD by comparing prices to relevant fundamentals.

Technical appendices covering methodology are available from your GMO representative.


EMD 4Q 2022_Exhibit 1.JPG

As of 12/31/2022 | Source: GMO calculations based on Bloomberg and J.P. Morgan data

Credit spread tightening was the main driver for the decrease in the multiple over the quarter, as the multiple’s denominator – the fair value spread or expected credit loss – rose slightly during the quarter. 1 Regular readers will recall that this fair value spread is a function of the weighted-average credit rating of the benchmark, along with historical sovereign credit transition data and an assumption about recovery values given default. 2