EM earnings - beware the consensus view
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There are signs
that the asset class has become oversold, and therefore
attracting bargain hunters – as indicated by recent positive
flows.
Take earnings forecasts with a pinch of salt
Earnings growth has been a positive driver for emerging
markets in recent years, improving flows into the asset class.
Now, against a backdrop of trade conflicts and political &
economic uncertainty in some quarters, earnings downgrades
would appear to be giving investors pause for thought.
Earnings data is, of course, hugely powerful in determining
market direction, and is an important (albeit imperfect) measure
of corporate health.
However, when differentiating between actual and forecast
data, it pays to be mindful of the nuance lost when looking
at aggregate numbers for what is a heterogeneous group of
markets. Wittingly or unwittingly, sell-side analysts can help
drive up correlations between countries and sectors, even
though economic and corporate fundamentals may, on a closer
assessment, look very different.
Falling in line with the house view
In the next few months, we expect to see the sell side
downgrading their estimates further. This is, in no small
measure, due to analysts trying to reflect their ‘house view’ of
economic growth, taking into account the pronouncements of
tariffs and counter tariffs from the US and China. These house
views are subject to almost daily revisions, even for one or two year
estimates.
However, these top-down adjustments don’t reflect company
fundamentals and, in actual fact, ignore many of the positive
prospects which are evident for emerging market companies.
Opportunities which a fundamental approach to active
management is best placed to identify.
For example, even in sectors such as utilities which have seen
significant downgrades, there are still opportunities if investors
are looking in the right places. Take China Gas for instance; the
company has an ambitious multi-year growth strategy centred
around expanding supply to domestic users, particularly in
rural areas where customers remain reliant on coal power for
heating and cooking. It plans to add over 4 million households
in 2018, a growth of around 15%1.
China Gas plans to add over 4 million households
in 2018, a growth of around 15%1
Revenues at the group will be driven by higher gas volumes,
as both new households and existing users increase
their gas consumption. In addition to volume growth the
company will also benefit from one-off connection fees on
newly connected homes. We expect China Gas to deliver
more than 20% revenue growth in the current financial
year ending March 2019. This is expected to translate to
earnings growth of a similar magnitude, 20%. All this is in
stark contrast of course to the earnings view for emerging
markets projected by aggregate numbers2.
Long-term positives
This is not to deny the short-term challenges in some (but
by no means all) emerging market countries, but we believe
the impact will be limited over a longer time horizon.
Current trade friction may be nerve wracking but
multinational supply chains will doubtless adapt, and
importantly, emerging market countries are increasingly
trading among themselves.
In fact, despite all the negative headlines, there are signs
that the asset class has become oversold, and therefore
attracting bargain hunters – as indicated by recent positive
flows.
The recent turbulence aside, it is important to remember
that the fundamental drivers which make emerging markets
attractive haven’t changed. These long-term growth
themes, whether supportive demographics, intra-regional
trade, domestic demand, or the powerful combination of
technology adoption, urbanisation and services sector
expansion, still provide phenomenal opportunities for
investors able to look beyond the noise.
The information provided should not be considered a recommendation to purchase or sell any particular security. It should not
be assumed that any of the security transactions discussed here were, or will prove to be, profitable.
1 Source: FactSet, China Gas annual report 2018.
2 Source: FactSet and Martin Currie.
Important information
This information is issued and approved by Martin Currie
Investment Management Limited (‘MCIM’). It does not
constitute investment advice.
Past performance is not a guide to future returns.
Market and currency movements may cause the capital value
of shares, and the income from them, to fall as well as rise and
you may get back less than you invested.
The opinions contained in this document are those of the
named manager(s). They may not necessarily represent the
views of other Martin Currie managers, strategies or funds.
The information provided should not be considered a recommendation to purchase or sell any particular security. It should not
be assumed that any of the security transactions discussed here were or will prove to be profitable