Analysts are the most bearish since March 2010 on the earnings prospects of emerging-market companies.
Profit estimates for firms on the MSCI Emerging Markets Index have dropped almost 10 percent since the start of 2015, taking the streak of downgrades into a fifth year. Analyst optimism has fallen by a quarter since reaching a post financial -crisis peak in 2011, according to data compiled by Bloomberg.
Expectations for a U.S. interest-rate increase have weakened all but three of the 24 major emerging-market currencies against the dollar this year, reducing earnings forecasts when measured in the U.S. currency. Companies are struggling to boost revenue as China suffers the slowest quarterly growth since 2009 and Russia’s economy shrinks amid sanctions linked to the conflict in Ukraine.
“Earnings expectations have been too positive for the last few years and we have seen a lot of downgrades,” Hertta Alava, who helps oversee 350 million euros ($388 million) as the head of emerging markets at FIM Asset Management Ltd. in Helsinki, said by e-mail. “GDP growth has clearly disappointed, which has been the biggest reason for earnings disappointments.”
The 838 members of the MSCI gauge, which spans 25 countries from China to Russia and Brazil, will earn $76.66 per share on average in the next four quarters, according to projections compiled by Bloomberg. That’s $8.39 less than the consensus forecast analysts made at the start of the year, the data show.
The International Monetary Fund cut its forecast for global growth this year, citing a weaker first quarter in the U.S. and singling out China and the euro area as sources of potential risk. The world economy will grow 3.3 percent in 2015, less than the 3.5 percent pace projected in April and slower than the 3.4 percent expansion last year, the IMF said in revisions to its World Economic Outlook.
Still, most of the bad news has been factored in and analysts may be approaching the end of their downgrade cycle, Alava said. Companies have responded to slower growth by cutting costs and that should help resume upgrades, she said. Firms on the MSCI measure increased their earnings before interest, taxes, depreciation and amortization as a proportion of revenue by 61 basis points last year, according to data compiled by Bloomberg.
“Margins are stabilizing now and could improve gradually,” Alava said. “That would improve returns on equity and allow some re-rating in the medium term.”
For now, though, analysts continue to cut earnings forecasts for emerging markets with some national benchmarks witnessing declines even in local-currency terms. Estimates have fallen this year by 20 percent for Brazil, 16 percent for Russia and 9.4 percent for China.
The MSCI developing-nations gauge slipped 0.2 percent to 941.13 on Tuesday, ending a three-day rally.
Emerging markets’ trade links to the U.S., euro area and Japan make them vulnerable to a reduction in earnings, Tony Hann, the head of emerging markets at Blackfriars Asset Management Ltd. in London, said.
“There is general acceptance of a weak global growth outlook,” Hann, who manages about $350 million, said in an e-mail. “Despite much excitement at the beginning of each year, the U.S. number gets gradually downgraded. I have low expectations that there will be much recovery in Europe.”