Investors piling into emerging-market equities despite still-sluggish profits – the globe and mail msci it

Investors piling into emerging-market equities despite still-sluggish profits – the globe and mail msci it Investors are piling into emerging-market equities despite still-sluggish company profits, hoping that signs of a gradual uptick in economic growth will end the sector’s five-year earnings recession. Investors generally demand stronger earnings from emerging market companies than their developed counterparts, to offset the sector’s volatility and corporate governance risks. But a Morgan Stanley report last year highlighted how earnings a share for emerging markets have shrunk since 2011, the longest stretch on record. That decline in what is considered a key profitability indicator, along with slowing economic growth, put investors to flight.

Msci emerging markets index


historical data MSCI’s emerging equity index fell some 30 per cent from the end of 2010 to the end of 2015. Now, many are calling a turn in the cycle – dedicated emerging equity funds have just enjoyed six weeks of inflows, the longest streak in two years, according to Bank of America Merrill Lynch. And the index has outperformed developed markets this year, rising 14.5 per cent, more than double the gains on MSCI’s all-country benchmark.

The rally is fragile, built primarily on an oil price bounce and the U.S. Msci inc careers Federal Reserve backpedalling on interest rate rises. But there are also palpable signs of economic recovery, which make some analysts more optimistic about company earnings. Brazil and Russia are starting to emerge from recession and many Asian countries have reported above-forecast second-quarter growth. Msci india index That includes China, where growth is at its slowest in 25 years but shows no sign of collapsing, as many had feared.

“It looks like we are at an inflection point. Msci indice Some of it is down to macro, in the form of China’s growth and exchange rate stabilizing,” said Jorge Mariscal, chief investment officer for emerging markets at UBS Wealth Management. “That is beginning to appear in expectations for earnings this year and the next,” Mr. Msci eafe index chart Mariscal said. Msci emerging markets index performance UBS Wealth was overweight emerging and U.S. Msci contact stocks in its global portfolio, he said.

Analysts’ latest consensus estimates, according to Thomson Reuters I/B/E/S, are for 7 EPS growth in 2016 and 13 per cent growth in 2017, well above developed markets. Msci full form That is up from a 6.5 per cent mid-July prediction for 2016. Geraldine Sundstrom, head of EMEA asset allocation at PIMCO, noted second-quarter emerging earnings had beaten consensus estimates by an average 2 per cent, the first positive surprise in two years.

PIMCO started redeploying capital to emerging markets in May, forecasting the negative earnings momentum would end soon. Msci index full form That would further benefit a sector which already trades at a hefty price discount to its history and to developed-market peers. “EM equities are increasingly looking like a value play with an earnings tailwind,” Ms. Msci europe index ticker Sundstrom told Reuters by e-mail. She has a “moderate overweight” on emerging equities, however, reflecting caution on a sector which has essentially been a pain trade for five long years.

For earnings recovery to take hold, emerging-market economic growth may have to accelerate from last year’s 4 per cent average, which the International Monetary Fund says was the slowest since the 2008 crisis. The IMF forecasts emerging economies will grow an average 4.3 per cent this year, rising to 4.7 per cent in 2017.

Msci world acwi Many fear that is not enough to boost earnings. A key driver for emerging-market equities is the growth premium developing countries typically enjoy over richer nations. Msci index For the market to perform, the average premium needs to be above 3.5 per cent, rather than the current 2 per cent, UBS research shows. As growth has underwhelmed in recent years, analysts had to repeatedly downscale earnings estimates.

Morgan Stanley advises clients nonetheless to raise exposure, forecasting economic growth to accelerate in 2017 for the first time in four years. Msci a share That should in turn fuel 7.7 per cent EPS growth, rising to 11 per cent in 2018, it predicts. JPMorgan also recommends buying emerging-market stocks “based on a return to EPS growth.” There are other improvements that could lift future earnings – reforms such as India’s approval of a unified tax system, should improve growth while building investor confidence.

Chuck Knudsen, a portfolio specialist at T. Msci company Rowe Price, highlighted declining inflation in Brazil and modest reforms – analysts expect EPS to jump 80 per cent there after years of declines and to expand 16 per cent in 2017. “It’s easy to say ‘it’s just commodities and it’s just a delayed Fed action move’… but what we’ll find is that growth is a little bit better in EM, that the earnings story has finally started to turn and relative earnings growth is going to be a little bit better,” Mr. Msci performance Knudsen said. “If that continues and we start to see continued improvements in margins and the like, people will start to get more confident in the EM story again.

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