The MSCI Emerging Markets Consumer Staples Index is valued at 19 times profit estimates, 57 percent more than the MSCI All- Country World Index and the biggest gap since Bloomberg began compiling the data in January 2006. The last time the premium climbed above 50 percent, in August 2010, the consumer measure trailed the global gauge by 16 percentage points in six months.
Investors snapped up stocks of retailers and food producers in emerging markets last quarter because their profits are sheltered from Europe’s debt crisis and a drop in U.S. hiring. Now, shoppers in the biggest developing nations are curbing purchases as interest rates rise. Retail sales growth in China and Brazil slowed in the second quarter, while the pace of Indian car purchases slipped to a two-year low and disposable income in Russia declined for a fifth month in May.
“Investors are better off avoiding the direct consumer sectors,” said Emil Wolter, the Singapore-based head of Asian equity strategy at Royal Bank of Scotland Group Plc. “There are a number of clouds overhanging the staples especially, which are at quite a significant premium to the broad market.”
The MSCI emerging-market index of food, beverage and household products companies gained 6.1 percent since the end of March, while the MSCI Emerging Markets Consumer Discretionary Index of clothing retailers, real-estate companies and automakers increased 7.9 percent.
The MSCI All-Country Index of stocks in developing and advanced countries slipped 0.8 percent as U.S. payrolls growth dropped to the slowest pace in eight months and speculation increased that Greece may default.
Lovable Lingerie Ltd. of Mumbai surged 71 percent last quarter and is valued at 50 times earnings, twice the average of global producers of fashion accessories and luxury goods. Brazil’s Cia. Hering, maker of Hering brand apparel, trades for 5.2 times sales, the highest on record relative to the Bovespa Index, after the company climbed 18 percent in Sao Paulo trading.
OAO Magnit, Russia’s biggest food retailer, advanced 2.7 percent in London and trades for 25 times estimated earnings, a record premium to the Micex Index. (INDEXCF) Want Want China Holdings Ltd. (151), the country’s largest maker of rice cakes and flavored milk, jumped 24 percent in Hong Kong and is valued at 36 times profit, three times more expensive than the MSCI China (MXCN) Index.
Lovable Lingerie shares sank 0.9 percent in Bombay, while Magnit shares traded in London dropped 3 percent as of 11:16 a.m. in the U.K. Want Want shares weren’t traded as Hong Kong markets were shut for a holiday. The MSCI staples index rose 0.2 percent while the discretionary gauge gained 0.5 percent, matching the 0.5 percent gain in the MSCI Emerging Markets Index.
Developing-nation staples companies boosted earnings at an annual pace of 19 percent during the past five years and makers of discretionary goods increased profits by 22 percent, two of the three top growth rates among 20 industry groups in emerging and developed markets, data compiled by Bloomberg and MSCI show.
The expansion slowed this year. Earnings in the staples index rose 11 percent in the first quarter, down from a 37 percent pace during the final three months of 2010, data compiled by Bloomberg show. The discretionary index had a 6.3 percent drop in profits, compared with 17 percent growth in the fourth quarter, the data show.
Emerging-market consumer companies, along with utilities, are the only industries among 20 groups where analysts predict profit growth will cool during the next five years, according to data compiled by Bloomberg and MSCI.
“We’re looking at the cheaper areas of the market,” said Ingrid Baker, who helps oversee $661 billion as an Atlanta-based emerging-markets money manager at Invesco Ltd. and has “underweight” holdings of consumer staples companies.
The stocks may keep climbing because most of the companies are beating analysts’ expectations, according to Martial Godet of BNP Paribas Investment Partners. Earnings in the MSCI emerging-market consumer indexes topped projections by about 1.4 percent on average during the first quarter, compared with an 8.6 percent miss for the broader MSCI emerging-market gauge, data compiled by Bloomberg show.
“There might be some stocks to avoid because valuation is stretched, and as sectors they are not cheap, but they are delivering and have some positive earnings surprises,” said Godet, the London-based head of emerging markets investments at BNP Paribas Investment Partners, which oversees about $70 billion in developing nations.
Data showing weaker spending growth in some emerging markets hasn’t derailed the long-term trend of rising incomes and demand for discretionary goods, said RBC Global Asset Management’s Philippe Langham. Developing nations will account for 93 percent of the global “middle class” by 2030 -- up from 56 percent in 2000 -- and half of a projected 800 million new middle-income consumers may come from India and China, according to Citigroup Inc.
“We see wage convergence with the developed markets as having a long way to go and an increasing proportion of income in the emerging-market world is being spent on discretionary items,” said Langham, who manages the $872 million RBC Emerging Markets Fund from London.
Retail sales growth in China declined in April and May, averaging 16.6 percent this year versus 18.6 percent in the second half of 2010, according to government reports. Brazilian sales declined 0.2 percent in April from the previous month, the first drop in a year. Russians’ real disposable income fell 7 percent in May from a year earlier, the biggest retreat since August 2009. Car sales growth in India dropped to the slowest pace since May 2009, the Society of Indian Automobile Manufacturers said last month.
Telecommunications stocks are a cheaper way for investors to bet on the long-term advance in emerging-market wages as spending increases on mobile services, according to RBS’s Wolter.
The MSCI Emerging Markets Telecom Services Index trades at 12 times analysts’ earnings estimates, a 38 percent discount to the staples gauge, data compiled by Bloomberg show. The telecom index has 4.1 percent dividend yield, the highest of any industry group in emerging markets and almost double the 2.2 percent yield for staples.
Internet stocks that retreated last quarter may offer buying opportunities for investors seeking exposure to consumer demand, according to Thornburg Investment Management’s Lewis Kaufman. MercadoLibre Inc. (MELI), the Buenos Aires-based online auction site that dropped 4.6 percent in U.S. trading since the end of March, may increase earnings by an average 33 percent in the next three to five years, according to analysts’ estimates compiled by Bloomberg.
“It’s good to look past the classic index definitions,” said Kaufman, whose Thornburg Developing World Fund topped 94 percent of peers this year and owned shares of MercadoLibre at the end of April, according to data compiled by Bloomberg. “You can be a little more creative in getting that exposure to the emerging-markets consumer in names that are still very much out of favor.”
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