Investors shun emerging-market shares as profit squeeze lingers
By Sujata Rao
LONDON, March 10 (Reuters) - An unrelenting squeeze on company profits is turning investors away from emerging equity markets, which look set to underperform their richer peers for a fourth straight year.
The 3 percent loss by emerging equities this year contrasts with 1 to 2 percent gains by developed and U.S. stocks, after a divergence in performance of almost 30 percent in 2013.
Emerging-market stocks are unlikely to recover until company profits pick up, analysts reckon. And if the latest earnings season is any guide, that will not happen any time soon.
Two-thirds of emerging companies have now reported results from the last quarter of 2013, and their net income has missed forecasts by around 6 percent, according to data compiled by Morgan Stanley. That will be the eighth quarter out of 10 that earnings fell below expectations, Morgan Stanley said.
Compare that with Japan, where companies have beaten net income forecasts by 13 percent, or the United States, where the "beat" is around 4 percent, Morgan Stanley says.
Separately, data from Thomson Reuters Starmine shows more than half the companies have missed earnings forecasts.
For investors, that means emerging companies may be doing fine at generating top-line revenues. They are doing less well at generating profits.
Yves Bonzon, CIO at Pictet Wealth Management, says weak return-on-equity (ROE) - the measure of how well a company uses shareholders' cash to generate profits - is a big worry. Continuación...