The emerging market has out-earned the developed market when compared to the earnings peak witnessed in 2007/2008, though its multiples have contracted, reports Citi.
Markus Rosgen and Yue Hin Pong of Citi thus feel emerging markets did well, but should have done better.
Emerging market earnings vs valuation
Markus Rosgen and team point out that the emerging market’s earnings are 14% above their pre-GFC peak, while it was 7% off for AC world. However, emerging market equities are down 26%, while AC world has witnessed deceleration of only 11%.
As is evident from the following graph, for EM in aggregate, its EPS number is some 14% higher than the prior peak, thus marginally out-earning the U.S. since the pre-GFC peak:
Citi analysts point out in the EM universe, with the exception of LatAm, the earnings bar is above zero, though the price is below zero. Thus, though the earnings have come through, the market has de-rated those earnings. The analysts observe in EM Asia, the P/E is half of what it was back in 2007. However, the analysts point out in 2007, Asia was indeed expensive. Markus Rosgen and team point out multiples contractions have been sharpest for China, India and Russia.
Contrary to this scenario, with AC world, the U.S. or Europe, witnessed only a marginal P/E contraction, though Europe actually witnessed a small P/E re-rating.
Citi analysts conclude the dichotomy has been due to issue of expectations, and this partly contributed to EM going wrong.
DM witnessed higher EPS revisions
Markus Rosgen and Yue Hin Pong of Citi plot the relative EPS revisions for DM vs. EM through the following graph. The analysts observe a rising line means DM earnings revisions are outperforming, and when the line falls EM earnings revisions are outperforming.
Citi analysts point out from 2005 to 2009 EM earnings revisions outperformed those of DM. Since 2010, earnings revisions in EM have lagged behind those in DM. The analysts thus feel with all these revisions, going forward, EM analysts will become more cautious, while DM analysts will become more aggressive, as they would feel that they have been too bearish as against actual earnings.
Markus Rosgen and team point out in EM, investing earnings revisions has beaten EPS growth by 2:1. Citi analysts feel it is not about delivery but about managing expectations. Thus EM delivered earnings, but failed to meet expectations. Hence Citi analysts conclude EM did a poor job in managing the expectations.