Emerging-Market Stocks Roar Higher on Signs of Best Earnings Since 2018

© Reuters.

(Bloomberg) — Investors in emerging-market stocks are finally getting rewarded, as promising signs for company earnings prompt the longest weekly rally since June.

For the first time in three years, developing-nation companies are beating profit forecasts, with average earnings coming in 3.6% above analysts’ projections, according to data compiled by Bloomberg. That helped to deliver a third week of gains for the . Traders are now awaiting results from index heavyweights including Samsung (LON:) Electronics (OTC:) Co., China Construction Bank (OTC:) Corp., and Sberbank of Russia, all scheduled to report this week. 

It’s a key moment for emerging equities, which have struggled with risks ranging from Chinese regulatory crackdowns to the threat of stagflation. The index was little changed on Monday as traders weighed inflation risks and a Covid-19 outbreak in China.

Investors that track the MSCI index are barely 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-market stock fund has outperformed 94% of peers over the past three months, the prospects for certain sectors look especially good. 

“Vaccine rates picked up and economies reopened, which should be positive for consumer earnings,” said Dorson, a money manager at Mirae Asset Global Investments in New York. “Emerging-market interest rates picked up and provisions came down, which should be a positive for bank earnings. And commodity prices have surged, which should be positive for energy and materials earnings.”

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While weakness from South Korea’s Samsung (KS:) was one of the top contributors of negative returns for the MSCI gauge in the third quarter, preliminary results from the technology company have already set the stage for a solid quarter. China Construction Bank’s earnings are expected to show a 10% climb in 2021 after a 1.6% gain in 2020, and consensus forecasts for Russia’s Sberbank revenue rose by about 3% in the past three months, with further upgrades possible. The three companies are among the top 20 holdings for MSCI’s equity gauge. 

Tension still lies in results from Chinese companies, which have been hit especially hard by anxiety over the government’s regulatory tightening and concern over Evergrande’s debt troubles. Stocks from the world’s second-largest economy make up about 31% of the developing-nation benchmark, making their performance critical for broader emerging markets.

Goldman Sachs (NYSE:) expects the MSCI EM index to reach 1,475 points in the next 12 months, or 11% higher in local currency terms, largely in line with gains forecast for developed markets. The firm is focused on shares that will benefit from “domestic reflation” trends in emerging markets outside of northern Asia.

“We are comforted to see these parts of the equity market with very steady earnings-per-share growth and performance in recent months, despite the macro headwinds from the Chinese property market and U.S. interest rate policy,” Goldman strategist Caesar Maasry said in a note.

Following are key data to look 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 with the prior quarter as a fresh wave of the virus crimped activity, though both continue to enjoy robust exports
  • China will report manufacturing and non-manufacturing PMIs on Oct. 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 property slump. The yuan has remained resilient this month
  • Brazil is expected to raise its key Selic rate by 125 basis points on Wednesday, to 7.5%. Analysts at UBS BB and Barclays (LON:) Plc forecast a 150-basis-point hike
  • Colombian policy makers will probably increase interest rates by a quarter-point on Friday to 2.25%
  • Egypt’s central bank is set to hold its benchmark at 8.25% on Thursday, with investors drawn to one of the world’s highest inflation-adjusted rates
  • Russia will release September industrial production figures on Wednesday and unemployment data on Friday

(Updates with MSCI index steady on Monday in 3rd paragraph.)

©2021 Bloomberg L.P.

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