A tougher path for emerging market equities


After five years of strong growth for the fundamental markets, they have gradually deteriorated. The benefits were then reaped in emerging markets, some regions of which continue to perform better than others.

As the economic boom in emerging markets continues, we believe that the decline in growth in the United States, Europe, the United Kingdom, Canada, Japan, and other developed countries gives cause for concern: the slowdown in export demand is likely to impact the earnings growth of multinationals in emerging markets.

In addition, problems in credit markets have increased risk aversion among investors around the world. This has generally prompted them to hedge their exposure to the most volatile asset classes.

Strong demand and soaring commodity prices are causing inflation rates to rise sharply in emerging markets. According to Global Insight, an independent forecasting firm, the total consumer price index for emerging markets rose to 9.7% in May from just 5.1% a year earlier. With average per capita incomes around $3,000 per year, spending on food and energy makes up a much larger share of consumer spending than in developed countries. We believe this amplifies the impact of record commodity prices on headline inflation trends.

As a result, the four BRIC central banks (Brazil, Russia, India, China) are in the process of raising their reserve requirements and their short-term interest rates in order to ease the pressure on fixed prices. In our opinion, this could impact the stability of the currencies of emerging countries, and in addition to undermining their ability to compete globally, it could also lead to a slowdown in economic growth and profits.

We think the rise in the yield spread between emerging market and US Treasuries confirms these fears, reflecting growing concern over the sustainability of their record gross GDP and corporate earnings growth.

As such, we do not expect another year of strong performance for emerging market assets. We have reduced our end-of-year targets relative to the MSCI EM index. Now pegged at 1175, equating to a 5.2% decline over the calendar year, our original target was 1275, equating to a 2.4% gain for 2008.

However, from a longer-term perspective, the recent sell-offs have, in our view, helped improve the risk/reward profile for emerging market equities. Reflecting consensus forecasts of 15% earnings growth in 2008 and a PER1 of 11.5, this asset class recently traded at the estimated 2008 PEG2 rate of 0.77%. Additionally, despite our neutral short-term outlook, we believe that long-term oriented investors should maintain their positions in these assets. Indeed, infrastructure and secular consumer-driven growth remain intact in developing countries.

The S&P tracker’s global asset allocations devote 3% and 6% to emerging market assets respectively for moderate and growth-oriented investors.


We believe that the region’s internal economic outlook remains strong thanks to rising per capita income, rising consumption, and significant infrastructure investment. But after several years of strong performance, emerging Asian equities have lagged most other international markets this year, and we expect this trend to continue through 2008.

From our perspective that domestic economic momentum would remain intact, we believe most of the challenges are external. One fear is that slowing growth in major export markets like the United States, Europe and Japan will affect the revenues and earnings of multinationals in emerging Asia. Indeed, the region’s economies continue to be largely export-oriented. Although the current growth rate for 2008 earnings remains in the lower double-digit range, it has declined significantly since January.


The performance of this asset class declined slightly in 2008. Indeed, the positive Czech returns were affected by the weak performance of Polish, Hungarian, Turkish and, to a lesser extent, Russian equities.

S&P believes that the region’s fundamental outlook is relatively healthy over the long term. Despite the slowdown in growth in the euro zone, where the main trading partners are located, Global Insight forecasts that emerging Europe will register real GDP growth of 5.7% for 2008, including that of Russia, largest economy in the region, assumed to grow by 7%.

Although the Russian economy may be too dependent on energy exports, we believe that two factors mitigate this risk. First of all, the increase in income and the development of credit have led to strong consumption by Russian households. This supports the growth of services and production, and helps to diversify the economy. Second, although the rise in speculation has corrected commodity prices in the short term, we believe that the secular increase in demand in emerging markets, combined with limited global production, will not fail in the long term. keep them up.

S&P expects emerging European stocks to outperform most other global asset classes by the end of the year.


Latin American equities are the best performers, the best asset classes this year, and Brazil’s performance was particularly strong, allowing it to overtake China and India and become one of the largest markets emerging stocks.

S&P’s equity research department believes that Latin America’s strong performance this year was driven by a relatively favorable macroeconomic environment: rising consumption, strong earnings growth momentum, and relatively low estimates. Global Insight forecasts that Latin America’s real GDP growth will be 4.6% in 2008, with Brazil estimated at 5.1%. In addition, Mexico is, in our view, weathering the US slowdown fairly well and is expected to post 2.9% real GDP growth in 2008.


Equities in the Middle East and Africa have recorded a slightly better performance for the current year than that of other emerging markets. In addition, the region’s returns remain less correlated to other global equity markets than those of developing markets in Latin America or Asia. For S&P, this is due to the fact that the phenomenon of globalization has not yet fully affected many of the countries in the region.

Given the increase in the global correlation of equities, financial managers are increasingly attracted to this asset class. In our opinion, this is a way for them to strengthen the diversification of their equity portfolio.

Equities in the Middle East and Africa are also benefiting from strong economic growth, which is supported on the one hand by the increase in the prices of raw materials, which are very liquid in this region, but also by the significant expenditure on infrastructure. governments.

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