What the EPS? EM vs DM Earnings Outlook
Here's the third installment of the new "What the EPS?" series, where I look at earnings trends across sectors, countries, regions.... taking my usual top-down approach. This week we look at the earnings outlook for emerging markets (EM) and developed markets (DM) - on both fronts I am specifically using the MSCI indexes, i.e. the MSCI Emerging Markets Index, and the MSCI World Index (as distinct from the MSCI ACWI). For the consensus earnings estimates I am using the Thomson Reuters IBES aggregates - which is basically the gold standard of consensus earnings estimates (they also cover a range of other metrics e.g. sales, cash flow, book value, etc).
The key takeaways on the trends in the EM vs DM earnings outlook are:
-Forward earnings growth is remarkably synchronized between EM & DM.
-On both fronts the pace of growth looks to have topped out.
-Long term earnings growth estimates reached a fever pitch for EM earlier this year, and might have actually been a contrarian sell signal.
1. Forward Earnings Growth: There's a couple of observations I would make about this chart (it tracks the 12-month rate of change in forward earnings - and by the way that growth rate usually tracks fairly closely with the growth in trailing earnings, but with a slight lead). First, there is a pretty high correlation (from 2003 the R2 is about 86%) between the two) - which speaks to the more interlinked global economy. Second, both appear to have topped out after a strong and synchronized upturn. The trillion dollar question is whether this topping out will look more like the 2005 experience (growth plods along at a solid pace), or the 2010 experience (growth rolls all the way over back to stagnation and contraction).
2. Consensus Estimates - Long Term Earnings Growth: The second chart follows on from last week's edition, where we looked at the long term earnings growth estimates for the S&P500. It seems to show a similar kind of sentiment signal, where the hopes of the best earnings growth can be found around the top of the market e.g. looking at 2000. It's remarkable how high the EM estimates had gotten, and one can't help but wonder if that excessive enthusiasm signaled the top for emerging market equities. It's certainly an asset class which I am paying close attention to and will be covering in depth in some upcoming research reports.
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