Emerging market stocks have soared this year after years of under performance. For example, while th S&P 500 is up just over 14% YTD Brazil’s Bovespa has increased by nearly 28%.
The year-to-date returns of some of the emerging markets are shown below:
India’s Bombay Sensex: 21.8%
Chile’s Santiago IPSA: 28.6%
Argentina’s Merval: 60.4%
Other major emerging markets such as China and Russia are up by about 10%.
I have written many times before that economic growth does not neecessarily lead to equity market in emerging markets. A recent article at AllianceBernstein noted that earnings growth is a key factor driving emerging market equities. From the article:
Emerging market (EM) equities have had a great run recently. But don’t buy EM stocks indiscriminately. Focus on company earnings over macroeconomic trends to find stocks that have stronger return potential with reduced risk.
The MSCI Emerging Markets Index has surged nearly 42% in just 21 months. That’s almost double the performance of the MSCI World Index of developed market stocks. After several tough years, EM are finally living up to expectations and unleashing powerful pent-up return potential.
What’s behind the strong momentum? It’s really all about earnings, and less about macroeconomics. In fact, contrary to conventional wisdom, the correlation between GDP growth and stock performance in EM is close to zero. On the other hand, the relationship between earnings and stock price is much more closely linked (Display).
That makes sense. Equity investors are ultimately investing in companies, not countries. And at the moment, the earnings outlook for companies in the developing world is robust, with consensus expectations projecting a 30% increase over the next two years.
Source: Follow the Earnings to Emerging Equity Stars by Sammy Suzuki, AllianceBernstein, October 10, 2017
The key takeaway for investors is that earnings matter in emerging markets also. More specifically it is not wise to invest in an emerging country simply because the economy is growing. It is very important to pay attention to earnings.
Related ETFs:
- iShares MSCI Brazil Index (EWZ)
- The Global X MSCI Argentina ETF (ARGT)
- WisdomTree India Earnings (EPI)
- iShares S&P India Nifty 50 Index (INDY)
- PowerShares India (PIN)
Disclosure: No Positions
