Wednesday, August 28, 2013

Emerging Markets Getting Squeezed (excerpt)

I don’t expect that yesterday’s anxiety attack over the deteriorating Middle East situation will turn into another panic attack for the US stock market. On the other hand, while US stock prices have been quite resilient this summer, the currencies, bonds, and stocks of emerging market (EM) economies have been getting clobbered. This has happened because global investors fear that the consequences of prospective Fed QE tapering will be more severe for the EMs than for developed economies.

That’s only part of the story. The fact is that the forward earnings of the MSCI Emerging Markets composite peaked at a record high during the week of August 4, 2011 and has been trending lower since then. Analysts’ consensus estimates for both 2013 and 2014 also are falling, and at a faster pace in recent weeks. Net earnings revisions have been negative for the past 30 months.

Revenues still are rising for the companies included in the MSCI EM index, but at a significantly slower pace since 2011 than during the global economic recovery of 2009 and 2010. The big story is the collapse of the forward profit margin since early 2011 from around 8.5% to 6.5% now. The likely cause of that is rising labor costs. The recent rise in oil prices must also be squeezing margins.

Today's Morning Briefing: Arab Winter. (1) Anxiety attack about US attacking Syria. (2) Geopolitical premium in oil prices rising again. (3) From spring to winter in the Middle East. (4) An Arab world war between Sunnis and Shiites. (5) Meet the Hatfields and McCoys of the Middle East. (6) A short guide to the region. (7) Bibi’s warning. (8) Why Syria matters to oil prices. (9) Putting a lid on valuation, for now. (10) Emerging markets had issues before the price of oil moved higher. (11) EM profit margins have been squeezed significantly. (More for subscribers.)

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