A Barclays Equity Research report published today suggests that now is the time to buy emerging market equities. Barclays analysts Dennis Jose, Ian Scott and Joao Toniato acknowledge that there are significant risks to jumping into EM equities right now, but they argue that current price levels relative to DM equities have proven to be bottoms on an historical basis.
The analysts also highlight that emerging market equities appear in general to be anticipating a contraction in earnings, while their models suggest a strong probability for continued, albeit weaker, growth in most emerging markets. The report concluded with a discussion of country and sector recommendations, and the addition of China Shipping Development Co Ltd (SHA:600026) (OTCMKTS:CSDXY), Gazprom OAO (MCX:GAZP) (OTCMKTS:OGZPY) and Sberbank Rossii OAO (MCX:SBER) (OTCMKTS:SBRCY) to overweight emerging markets in Barclays’ Global Recommended Portfolio.
Overblown correction driven by worries about slowing growth, not Fed taper
Jose et al advance the argument that the main reason for the ongoing pullback in emerging market equities is the perception of slowing growth. They say that emerging market equities were never really “juiced” by Fed policy per se – they appreciated on rapidly increasing earnings and the prospects for that to continue. When growth started to decelerate as part of the natural economic cycle, investor sentiment quickly turned negative although there was little objective reason for negativity, at least over the medium to long term.
Emerging market price appreciation will be driven by earnings growth
Despite negative investor sentiment, the Barclays report suggests there is still a high likelihood for strong earnings growth in most emerging markets over the next couple of years. “Our model indicates that earnings growth for emerging market could be as high as 10% in 2014 and 13% in 2015, contrary to the decline in earnings that seems to be currently priced in. Better earnings numbers could be the catalyst for outperformance.”
Barclay’s emerging market recommendations
The analysts conclude the report with selected country, sector and individual equity recommendations. “We find compelling value in Korea, Taiwan, China, India and Russia, and within sectors, in Financials, Energy, IT and Materials. To reflect this, we increase our overweight in emerging markets in our Global Recommended Portfolio by adding China Shipping Development Co. Ltd., Gazprom and Sberbank.”