The March to April outperformance in EMs is linked to several factors, but the most noticeable has been traditional bottom-up stock fundamentals. There have been others of note, including some form of Chinese acceleration on increased domestic infrastructure spending as it looks to stabilise its industrial production and GDP, as well as the continuation of the carry trade.
Cheap EM stocks on fundamentals
The prime example of an EM stock that is delivering solid earnings figures is the Agricultural Bank of China (ABC). As the third largest lender by market capitalisation in China, the bank posted a 14% increase in Q1 profit as it saw profits being boosted by increasing net interest margins, loan income and fee-based services.
With net income totalling CNY53.4 billion (approximately US$8.5 billion) for the March quarter, versus a consensus estimate of CNY52.4 billion, net interest income hit CNY103.1 billion - a 16% increase year-on-year, with commission earnings gaining 3.4% over the same period. Considering the ABC is currently trading on a price-to-earnings ratio (P/E) of 4.72, with a blended forward P/E of 4.1 times, it is certainly at the lower end of the scale.
However, like all EM stocks, ABC does come with some risk attached. The bank saw bad and doubtful debts expanding, which does underscore the challenges being faced by the Chinese lenders as the slowdown in trade conditions filter through. However, its earnings stream looks to be more than offsetting this concern.
ABC is just one of a number of EM companies that is finding fundamental support. However, it does raise the questions: can the recent rally and support for emerging markets continue? Are there possible signs as to what might see continuing sustained rally?
The EM versus DM
When comparing emerging markets to the developed markets most concentrate on the long-term average and the movements of the last three-years can be attributed to a correction in EMs, which outperformed most DMs in the early to mid-2000s.
However, the pace of growth in the DM since the GFC could be considered a ‘normalisation’ of stocks that were severely undervalued on panicked selling during 2007 to 2009, rather than deleveraging from EMs.
The recent rally does have the prospect of maintaining current momentum, as several EMs have seen vast improvements to their economies. This increase in economic growth should filter through to higher equity returns despite the fact EMs have slightly run ahead of DMs on a forward P/E basis (14.1 times to 10.2 times - source Bloomberg).
The EM markets traders are watching
The EM markets that have strong export growth and global presence should continue to dominate the EM space. Asian markets are particular standouts due to their global edge and export-dominated economies. Korea has added 10% since the June 13 low and looks to be building further momentum on heavy-weights Samsung and LG, which have produced solid earnings numbers.
Indonesia and Malaysia are also EMs to watch as both have seen solid economic prints in the previous year, coupled with favourable conditions in core exports as China cracks down on loop holes. These two markets do appear to also be on the cheaper end of the fundamental measures and have support economies.
EMs remain an exciting part of the global market space and they are likely to continue to perform solidly over the coming year with Asia’s EMs the standout of the group.
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