Call it a double bottom in sentiment. Emerging market analysts became bullish in July, the first such turn for that month since 2011. History will tell whether they're right but if they continue to become more optimistic about earnings prospects, they'll at least help developing market stocks look less expensive.
The consensus estimate for earnings per share of companies in the MSCI Emerging Markets Index rose 1 percent in July to $66.3. July is the month when second-quarter earnings start to roll in, prompting analysts to adjust their view of the world, so the revision is significant. The measure touched its lowest since 2009 earlier this year.
That's good news for anyone who was looking for justification for adding emerging-market stocks and was put off by their valuations. At 13.5 times projected earnings, the MSCI gauge is trading at its highest multiple since 2009.
Bulls can argue the measure has been suffering from negative sentiment, with downgrades in profit expectations pushing the ratio higher. The trouble is that recent history suggests analysts have been right to be pessimistic on profits. Trailing earnings per share for the index have been dropping steadily and are now at their lowest since 2010.
This helps explain why the trailing price-to-earnings ratio is at 16, the highest since 2010.
To be sure, the S&P 500 Index in the U.S., which often acts as a bellwether for emerging markets, has been repeatedly setting records this year. At 18.5 times expected earnings, the gauge is at its most expensive since at least 2002. So on a relative basis, developing stocks are still lagging their developed peers. The caveat is that developed market stocks may themselves be overpriced, with trillions of dollars of negative-yielding debt pushing investors into equities in search of higher returns.
Those seeking better value have little choice but to go into less developed stock markets. Whether analysts are correct in predicting a pickup in earnings, the trend looks set to continue. Emerging market stocks will remain attractive as long as the world's largest central banks continue with record monetary stimulus.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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