|
 Emerging markets are the black hole in the global equity picture at
a time when Wall Street has hit record highs, European stocks are at
seven-year peaks and Japanese markets at the highest in 15 years,
buoyed by central bank money-printing and recovering economies.
MSCI's emerging equity index, in contrast, stands more than 20
percent below record highs hit in 2007 and despite notable
exceptions such as India and China, it has lagged the world index by
more than 50 percent since end-2010.
Dedicated emerging equity and exchange-traded funds have seen
outflows of $60 billion in the past two years, according to EPFR
Global data cited by JPMorgan Asset Management.
And now, with the United States to start raising interest rates and
emerging currencies wilting against the resurgent dollar, U.S.-based
investors have even less incentive to place cash in the sector.
"The call we are making is developed markets versus emerging
equities, and despite strong outperformance in DM since the end of
2010, we don't see any reason to reverse our position," said
Jonathan Lowe, portfolio manager in JPMorgan Asset Management's
multi-asset group.
"In fact, the amount of stimulus we are seeing in places like Japan
and euro zone is wanting us to be more underweight EM," Lowe added.
More than half of the global investors surveyed by Bank of
America/Merrill Lynch in March said emerging markets was the asset
class they would underweight in the coming year.
SLOWER GROWTH
Several things have gone wrong, the first being that emerging
markets are on track for a sixth straight year of slowing economic
growth, shrinking the traditional growth premium they enjoy over
advanced peers.
That premium will be less than 2 percentage points this year, the
International Monetary Fund predicted this week, compared with 4.5
percent as recently as 2013. And with Chinese growth at a six-year
low, short-term improvement seems unlikely.
Consumption and fixed capital formation in emerging markets both
slowed in the last quarter of 2014, while export growth has declined
for three years straight, UBS analysts said.
This in turn has caused disappointment on the earnings front - even
in India where stocks are up a third since end-2013, 40 percent of
companies undershot earnings forecasts in the latest quarter, Morgan
Stanley noted.
"If we get 3.5 percent global growth this year that's going to be on
the high side. You need 4 percent global growth to get a pronounced
pick-up in EM profitability," Lowe said.
Earnings-per-share (EPS), a key profitability marker, will have
grown at a compounded annual rate of 3.8 percent between 2013-2016,
Morgan Stanley calculates, contrasting this with 15 percent in
Japan. (http://link.reuters.com/gup54w)
EPS will grow by 1.6 percent in 2015, the bank predicts. For Japan
it expects 16 percent.
POOR RETURN ON EQUITY
Emerging markets rely on big state-run banks, mining and oil
companies, which have been unable or unwilling to cut costs or
employees in the manner of Western rivals.
[to top of second column] |
Because companies did not cut costs when growth and export markets
soured, return on equity (ROE), a gauge of how efficiently a company
uses shareholders' equity investment to generate profits, started
declining in emerging markets after 2008 and has yet to recover:
http://link.reuters.com/wyr57v
Emerging markets companies earn 12.6 cents for each dollar of
shareholder money invested - three cents below U.S. rivals.
"In the United States the first two years of the bull market
happened not because the economy was recovering but because
companies were efficient in cutting costs, and that in EM has not
happened yet," said Jorge Mariscal, chief investment officer for
emerging markets at UBS Wealth Management in New York.
"Once world growth starts recovering faster, then it is difficult
for me to envision that EM will continue to lag behind...but we are
6-12 months away at least from that."
One of the few things favoring the sector is that stocks in MSCI's
emerging index are cheap relative to history, trading at an average
11.6 times predicted earnings while developed equities are at nearly
17 times: http://link.reuters.com/rut87v
Fund managers with freedom to invest off-index can also find
opportunities. Emerging indexes skew towards big countries such as
Brazil, often masking outperformance in tiny markets such as Hungary
which has rallied 15 percent this year in dollar terms.
Mariscal, for instance, has less allocation to emerging markets than
their weight in global indexes but is tactically overweight in
Taiwan, India and Philippines, noting improving growth and company
earnings among other factors.
That bifurcation may deepen as U.S. interest rates rise.
In markets such as Taiwan and South Korea, a broadening U.S.
recovery may boost earnings, UBS analysts note. But in others like
Turkey, Brazil and South Africa, recovery may be further off because
their cost of equity is tied to the United States but earnings rely
on European and Chinese growth.
(Reporting by Sujata Rao; Graphics by Vincent Flasseur; Editing by
Peter Graff)
[© 2015 Thomson Reuters. All rights
reserved.] Copyright 2015 Reuters. All rights reserved. This material may not be published,
broadcast, rewritten or redistributed. |
