A combination of factors, including a strong US dollar, have held back emerging markets in the first half of 2022.

For several reasons a stronger dollar is not typically good news for emerging markets. When the US currency strengthens, money invested in other parts of the world, including developing economies, often finds its way back to the relative safe haven of the US.

Second, and perhaps more importantly, many emerging markets have dollar-denominated debts which become more expensive to service as the relative value of their domestic currencies drops.

With many commodities priced in dollars, these become more expensive to import, contributing to inflation. Though in the case of net commodity exporters like South Africa, Saudi Arabia, Brazil and Indonesia this can have a beneficial impact.

The difficult backdrop has been reflected in falling market valuations, but which sectors are particularly cheap?

A look at the MSCI Emerging Markets Value index provides some insights. The index includes stocks which meet certain criteria based on book (or net asset) value to price, the multiple of forecast earnings and dividend yield.

As at 30 June 2022 this collection of 806 stocks offered a yield of 4.6% and traded on a forward price to earnings ratio of 8.2 times compared with the wider MSCI Emerging Markets index where the corresponding figures were 3.1% and 10.9 times respectively.

Financials is the largest sector in terms of weighting, followed by information technology and consumer discretionary.

This outlook is part of a series being sponsored by Templeton Emerging Markets Investment Trust. For more information on the trust, visit here

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