Last updated: 14:24 / Thursday, 13 December 2012
A good GDP is not enough

Why Do Investors Turn Their Backs on Emerging Markets?

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Why Do Investors Turn Their Backs on Emerging Markets?

As explained by Christopher Laine, portfolio manager at the active emerging markets investment team in State Street Global Advisors, "the correlation between GDP growth and stock market returns is modest, at best". According to “Emerging Market Fundamentals: An Update as We Enter the Final Stretch of 2012”, a recently published report by State Street Global Advisors, equity markets are much more dependent on earnings growth than on GDP growth, and this would be the reason why investors have remained skeptic over emerging markets during the last months. “In 2012 emerging markets earnings growth has stalled”, affirms State Street in its recent report, adding that this is the main reason for its lack of popularity, not its valuation, which is reasonably attractive at 10x forward earnings, a 20% discount over their development peers.

In absence of stronger global growth, emerging markets corporations have a tougher time growing in volume, so they must improve their margins. This is the conclusion pointed out by Laine, who also thinks that leverage could be an adequate tool to boost shareholder profitability. “The rerating of emerging markets debt has a secondary effect for the equity investor: lower interest costs and a lower overall cost of capital”, he explains. “Leverage is low for emerging corporations (about 27% net debt-to-equity), so the direct reduction in interest costs may not be a ‘game changer’. It may, however, allow companies to gain the confidence to increase their leverage”, concludes Laine.

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