Before dipping into emerging markets, assess their growth outlooks.
But first, make sure you understand the relationship between GDP growth and earnings growth in those regions, says Michael Reynal, a portfolio manager at RS Investments. RS Investments sub-advises the Renaissance Emerging Markets Fund.
“The question is whether GDP growth, which is substantially higher in emerging markets, has an impact on earnings growth,” he adds.
For 2014, Reynal’s looking for average GDP growth of 4.5% in emerging markets, and is anticipating a rise to 5.2% or 5.3% in 2015. “Compared to that, developed markets will be ticking along at 1.8% and 2.2% growth in 2014 and 2015, respectively.”
At the same, he says, “earnings growth for emerging markets should be 8% [this year], jumping to about 12% [or] 13% next year. Developed markets [will] tick along at roughly 9% this year and next.”
In terms of analyzing how GDP and earnings growth statistics relate to one another, as well as how they impact your assessment of global equity markets, Reynal says earnings growth is often more telling than GDP growth.
“GDP growth as sales growth is simply not a predictor of future returns,” he says. Surges in “earnings growth — and, equally important, earnings revisions — tend to be great signals of equity returns.”
Currently, Reynal finds earnings growth in emerging markets is low. “We have had a sluggish four or five years due to a slow global cycle,” and that’s impacted materials and other export-dependent companies.
But, on the upside, “that’s going to turn around, and looking into 2015, we [predict] positive earnings revisions at 12%, as the economy continues to accelerate slowly but steadily.”
To date, ROEs in emerging markets are bumping along at 14% to 15% level, and “we expect earnings growth to match that [level] over time, if not surpass it.”
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