Faster profit upgrades put emerging markets ahead of US stocks

Emerging markets are posting the fastest earnings upgrades globally. Equity analysts have boosted the average profit forecast for companies in the MSCI Emerging Markets Index by 12.1 per cent in dollar terms since a low on June 1. That’s edged past the 12 per cent increase for earnings estimates in the S&P 500 Index in the period. Developing-nation predictions are also rising at twice the pace as those of Europe.

Initially, most emerging-market upgrades came from China, which is set to be the lone major economy posting growth this year. But Latin America has seen the fastest surge in profit expectations in the past two months, suggesting the economic recovery from the coronavirus pandemic is beginning to be more broad-based.

“China has been a significant source of strength, but emerging markets’ earnings recovery is much broader,” said Nader Naeimi, head of dynamic markets at AMP Capital Invetors in Sydney. “The strong recovery in the global manufacturing cycle and commodity prices has underpinned earnings across Latam. I expect this trend to continue, especially if the Covid vaccine becomes a reality and under a landslide victory by Joe Biden.”

The better profit outlook means emerging-market stocks are becoming cheaper.

The MSCI EM gauge now trades at a discount of 34 per cent to the S&P500, compared with an average 25 per cent since the global financial crisis. Relative to Europe, emerging-market stocks are 15 per cent cheaper, compared with an average of 12 per cent.

“The valuation of emerging markets, particularly those outside technology-biased China, Korea, and Taiwan, is generally much more appealing,” said Hasnain Malik, the Dubai-based head of equity strategy at emerging-market research firm Tellimer.

“The best opportunities sit in the smaller, cheaper emerging markets, particularly those with reform and potential export growth-led stories like Indonesia or Vietnam.”

Within emerging markets, the index for Latin American stocks has posted an 18 per cent increase in profit estimates since the end of May, overtaking Asia’s 13 per cent. The emerging Europe, Middle East and Africa region is the laggard with forecast growth of 3.4 per cent.

“Despite all the political noise, there is a global cyclical recovery going on and Latin America should be one of the beneficiaries of such a recovery,” said Luiz Ribeiro, a money manager at the Itau Asgard unit of Itau Unibanco SA in Sao Paulo. “Lower rates and plenty of liquidity should fuel this.”