LONDON, July 30 (Reuters) - Corporate earnings have been shrinking in emerging markets for four years, the longest recession in the history of the MSCI emerging index, and the declines are deepening, research from Morgan Stanley showed on Thursday.
August marks four years since earnings-per-share (EPS) peaked in emerging markets and it has since fallen by 25 percent, Morgan Stanley calculates. The longest prior earnings recession in the asset class was after the 1997 Asian crisis and lasted two years, it added.
Emerging stocks on the MSCI, the most widely used equity benchmark, are in their fifth year of underperformance versus developed peers amid slower growth, weak reforms and the prospect of higher U.S. interest rates. More recently, they have been pressured by a Chinese equity rout.
So far this year the index is down 6 percent.
Morgan Stanley said the picture looked worse than 2008-09 when EPS fell 62 percent from peak-to-trough but started recovering in 18 months, as developing countries’ balance sheets and external positions were stronger than now and central banks were able to cut interest rates.
“The key negative remains the ongoing earnings recession which is worsening and broadening under the pressures of productivity growth, reform shortfalls, China’s ongoing hard landing, generalised commodity price weakness and U.S. dollar strength,” the bank added.
“We do not see any sign of an inflexion point near term in these formidable EPS headwinds.”
Morgan Stanley said aside from Taiwan, eleven of the twelve largest emerging countries and all ten sectors were now in earnings recession, with the biggest EPS falls in Brazil and Russia at 72 percent and 61 percent respectively.
Both countries are in economic recession as China, their main commodity importer, is expected to post its worst growth in a quarter century. Chinese earnings went into recession in October 2014, since when EPS has fallen by 5 percent, Morgan Stanley added.
EPS declines have been biggest at 86 percent in the materials sector, while industrials and energy EPS is down more than 50 percent over the four years, the data showed.
Another headwind was the rising dollar because “for EM, a strong dollar and weak EM currencies have a negative impact on earnings in dollar terms via the translation effect,” the note added. (Reporting by Sujata Rao, editing by John Stonestreet)