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Emerging Stocks Suffer as Earnings Gap Shrinks

Emerging-market companies have to become more profitable to draw the foreign investment needed to lift their shares, according to Pierre Lapointe, head of global strategy and research at Pavilion Global Markets Ltd.

The CHART OF THE DAY displays the differential between returns on capital -- equity and debt -- for companies in the MSCI Emerging Markets Index and those in the MSCI World Index, which tracks developed markets.

Returns on the emerging-market gauge came out ahead last year by as little as 0.7 percentage point, the narrowest spread since 2000, according to data compiled by Bloomberg. The gap as of yesterday was 1.1 points, well below a peak of 4.8 points in May 2002.

“The reward for taking more risk by investing in emerging markets is now minimal,” Lapointe, based in Montreal, and two colleagues wrote yesterday in a report with a comparable chart. Many foreign investors “are probably sticking with developed markets,” they added.

MSCI’s emerging-markets index, comprised of stocks from 21 countries, had a 2.2 percent loss for the year as of yesterday. The decline contrasted with a 6.8 percent gain for MSCI World, covering 24 developed markets. The emerging-market gauge has trailed since August 2011.

“What will it take for emerging markets to start outperforming again?” the report said. “They need to boost profitability.” Returns on capital in most emerging countries represented in the MSCI index have fallen since 2007, when the indicator set a record, data compiled by Bloomberg show.

To contact the reporter on this story: David Wilson in New York at dwilson@bloomberg.net

To contact the editor responsible for this story: Chris Nagi at chrisnagi@bloomberg.net

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