Beware Consensus View

Beware Consensus View

Earnings growth has been a driver for emerging markets in recent years. Now, amid a backdrop of trade conflicts and political & economic uncertainty in some quarters, earnings downgrades appear to give investors pause for thought.

Earnings data provides a measure of corporate health and is hugely powerful in determining the direction of equity markets.

However, when differentiating between actual and forecast data, nuances can be lost when looking at aggregate numbers for what is a heterogeneous group of markets. So, sell-side analysts can help drive up correlations between countries and sectors, even though economic and corporate fundamentals may, on a closer assessment, look very different.

Falling in line with the house view

In the next few months, we expect to see the sell side downgrading their estimates further. This is due to analysts trying to reflect their ‘house view’ of economic growth, taking into account the pronouncements of tariffs and counter tariffs from the US and China. These house views are subject to almost daily revisions, even for one or two-year estimates.

However, these top-down adjustments don’t reflect company fundamentals and ignore many of the positive prospects which are evident - opportunities which discretionary active management is best placed to identify.

For example, even in sectors such as utilities which have seen significant downgrades, there are still opportunities if investors are looking in the right places. In countries such as China, rural areas are starting to gain the same infrastructure upgrades as cities. This can lead to millions more customers for utility companies and multi-year growth. Such sector growth is in stark contrast to the earnings view for emerging markets projected by aggregate numbers1.

Long-term positives

This is not to deny the short-term challenges in some emerging market countries, but we believe the impact will be limited over a longer time horizon.

Current trade friction may be nerve-wracking but multinational supply chains will doubtless adapt, and importantly, emerging market countries are increasingly trading among themselves.

In fact, despite all the negative headlines, there are signs that the asset class has become oversold, and therefore attracting bargain hunters – as indicated by recent positive flows.

The recent turbulence aside, it is important to remember that the fundamental drivers which make emerging markets attractive haven’t changed. These long-term growth themes, whether supportive demographics, intra-regional trade, domestic demand, or the powerful combination of technology adoption, urbanisation and services sector expansion, still provide phenomenal opportunities for investors able to look beyond the noise.

1Source: FactSet and Martin Currie.



 

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