In a recent article written for the FT, RBA’s Richard Bernstein makes the case (again) that the Emerging Markets growth story is flawed if one stops to analyze the data.
“Profits data increasingly refute the widely held belief that the emerging markets offer the best growth. Approximately 60 per cent of EM companies reported negative earnings surprises for the fourth quarter of 2012. The comparable figure in the US was only 27 per cent. Earnings expectations for EM companies seem much too optimistic.
In addition, the projected earnings-per-share growth rate for US small-cap stocks is double that for EM stocks. Based on data from Bloomberg, the projected 12-month EPS growth rate for the S&P Small Cap 600 is 34 per cent, whereas the comparable number for the MSCI Emerging Markets universe is only 17 per cent. US domestic stocks currently offer better growth and are certainly under-owned.
US domestic stocks remain largely ignored despite the length and magnitude of their outperformance. The S&P Small Cap 600 Index has significantly outperformed the MSCI Emerging Market Index over various periods, yet it is the emerging markets that continue to command attention among investors and the financial media. Over the past five years, US small-cap shares have risen nearly 50 per cent, whereas investors in emerging markets have seen a small loss (49 per cent total return versus -0.1 per cent over the five years to April 30).
Investors generally accept that the global credit bubble is deflating, yet they continue to overweight credit-related asset classes. Emerging markets, commodities, gold, hedge funds, real estate and private equity performed well as the credit bubble expanded because they are all credit-sensitive assets. Their performance since the credit bubble began to deflate in 2008 has generally been inferior.
Investors seem to be waiting for these asset classes to come back, much as they spent a good portion of the early 2000s waiting for technology stocks to rebound. Meanwhile, a more exciting growth story has surfaced in an unexpected segment of the global equity markets.
The US stock market has outperformed emerging markets for more than five years, and that outperformance has been led by domestic stocks rather than by multinationals. A sea change within the global equity markets is well under way, but investors seem completely unaware.”