Investors in emerging market stocks are finally being rewarded as promising signs for the company’s earnings trigger the longest weekly rally since June.
For the first time in three years, companies in developing countries are beating earnings forecasts, with average earnings exceeding analyst projections by 3.6%, according to data compiled by Bloomberg. That helped generate a third week of gains for the MSCI emerging markets index. Traders are now awaiting results from the index heavyweights, including Samsung Electronics Co., China Construction Bank Corp. and Russia’s Sberbank, all scheduled to report this week.
It’s a pivotal time for emerging stocks, which have struggled with risks ranging from Chinese regulatory crackdown to the threat of stagflation. The index changed little on Monday as traders weighed the risks of inflation and a Covid-19 outbreak in China.
Investors tracking the MSCI index are just breaking even, with the gauge poised for its worst annual performance since 2018. But a strong earnings season could make all the difference.
For Malcolm Dorson, whose emerging markets equity fund has outperformed 94% of its peers in the past three months, the outlook for certain sectors looks especially good.
“Vaccination rates rebounded and economies reopened, which should be positive for consumer earnings,” said Dorson, a fund manager at Mirae Asset Global Investments in New York. “Emerging market interest rates rebounded and provisions fell, which should be positive for banks’ earnings. And commodity prices have risen, which should be positive for energy and material gains. ”
While the weakness of South Korea’s Samsung was one of the main contributors to the negative returns of the MSCI indicator in the third quarter, preliminary results from the technology company have already laid the foundation for a strong quarter. China Construction Bank’s earnings are expected to show a 10% increase in 2021 after a 1.6% increase in 2020, and the consensus forecast for Russia’s Sberbank revenues increased by about 3% in the last three months, with possible further improvements. All three companies are among the top 20 positions for the MSCI stock indicator.
The tension still lies in the results of Chinese companies, which have been hit especially hard by anxiety over government regulatory tightening and concern over Evergrande’s debt problems. Stocks in the world’s second-largest economy account for roughly 31% of the developing country benchmark, making their performance critical for broader emerging markets.
Goldman Sachs expects the MSCI EM index to hit 1,475 points in the next 12 months, up 11% in local currency terms, largely in line with anticipated gains for developed markets. The firm is focused on stocks that will benefit from “domestic reflation” trends in emerging markets outside of North Asia.
“We are comforted to see these parts of the stock market with very consistent earnings-per-share growth and performance in recent months, despite macro headwinds from the Chinese housing market and US interest rate policy. “” Goldman strategist Caesar Maasry said in a Note.
The following are key facts to watch out for this week:
- South Korea and Taiwan will release third-quarter GDP data on Tuesday and Friday, respectively. Both are expected to report a slowdown in the annual pace compared to the previous quarter, as a new wave of the virus reduced activity, although both continue to enjoy strong exports.
- China will report manufacturing and non-manufacturing PMIs on October 31, which may indicate whether the slowdown in the world’s second-largest economy is gathering momentum. Growth eased in the third quarter amid an energy crisis and a real estate recession. The yuan has remained resilient this month
- Brazil is expected to increase its key Selic rate by 125 basis points on Wednesday, to 7.5%. Analysts at UBS BB and Barclays Plc forecast an increase of 150 basis points
- Colombian lawmakers will likely raise interest rates by a quarter of a point on Friday to 2.25%
- Egypt’s central bank will hold its benchmark at 8.25% on Thursday, with investors drawn in by one of the highest inflation-adjusted rates in the world.
- Russia to release industrial production figures for September on Wednesday and unemployment data on Friday
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