Earnings Are No Longer an Excuse to Avoid Emerging-Market Stocks

(Bloomberg) -- For global money managers, the risk-reward balance is tilting in favor of buying into emerging-market stocks rather than staying on the sidelines.

From superior economic growth to attractive valuations, there have been plenty of arguments to support the view that investors should have taken greater exposure to developing-nation shares this year. But they hesitated on one overriding concern: the U.S.-China trade war threatened to hamper company earnings.

Now that's changing.

Analysts have halted a six-month run of downgrades for emerging-market companies, raising them in June by the most for any month since January 2018. In fact, the forecasts have climbed on 18 of the past 23 days, suggesting the upturn is no blip.

The pace of increases in profit projections has outstripped that of developed markets -- a sign of growing confidence emerging-nation companies will withstand the impact of a global slowdown better than peers. That conforms with the consensus that the developing world will widen its lead over richer countries this year and the next.

Investors are taking note. The benchmark MSCI Emerging Markets Index is heading for a sixth weekly advance, and buyers of exchange-traded funds have added money for the past two weeks, ending a seven-week streak of withdrawals.

G-20 Effect

While earnings estimates gained a boost last week after U.S. President Donald Trump held back from imposing punitive tariffs on a further $300 billion of Chinese exports, the turnaround had already started. Even as Asian companies remained under a cloud in the run-up to the Group of 20 summit in Osaka, analysts began raising forecasts for their counterparts in the emerging Europe, Middle East and Africa region.

But Asia was quick to catch up. Estimates have risen for the past two weeks, the first back-to-back increases in seven months. Meanwhile, ETF investors put money into funds buying Chinese equities for the first time in nine weeks.

Read: Amassing China Stocks Proved Right Call for G20-Savvy Investors

The 9.2% gain in the MSCI emerging-market gauge during the first six months of year came in fits and starts. But if improving earnings estimates are any indication, the second quarter may witness a more lasting rebound, especially in a world beset with negative-yielding assets and ever-shrinking value in developed-market equities.

To contact the reporter on this story: Srinivasan Sivabalan in London at ssivabalan@bloomberg.net

To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Justin Carrigan

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