The Zhitong Finance App notes that profit expectations for emerging market stocks continue to soar, making their valuations historically low compared to similar US stocks, or providing potential buying opportunities for long-term investors.
The current expected price-earnings ratio of the MSCI Emerging Markets Index is slightly less than 9 times, based on the expected profit for the next 12 months, while the corresponding valuation of the S&P 500 constituent stocks is about 19 times. The valuation discount of emerging market stocks compared to US stocks reached 53%, the highest level since Bloomberg began compiling this data in 2006.
Since this year, the Emerging Markets Index has continued to rise 15%, outperforming the S&P 500 by about 3 percentage points. The profit forecast for the year rose much faster than the share price increase, thus depressing the valuation level.
Artificial intelligence companies contributed most of the increase in earnings in emerging markets. While US hyperscale cloud vendors are investing heavily in AI development, technology companies in developing economies are largely responsible for this expenditure, supplying chips, components, and hardware for AI infrastructure.
Emerging market stocks are getting cheaper
This prompted analysts to raise earnings expectations for emerging market tech stocks, even as concerns about AI valuations are driving investors out of the sector more broadly.
Mark Matthews, head of Asian research at Swiss Baer Bank in Singapore, said: “Prices of products produced by Asian technology companies, that is, semiconductors and related hardware, have not declined.” “US tech companies in general have been raising their profit guidelines for analysts. They are the largest customers of semiconductor and related hardware companies in Asia.”
The profit prospects are bright
A comprehensive 12-month forecast of the average profit of the companies in the MSCI Emerging Markets Index is expected to soar 70% this year alone, repeatedly reaching new highs. Asia led with an 87% increase in earnings per share expectations, while Latin America contributed 28%, while emerging Europe, the Middle East, and Africa, a region at the center of multiple conflicts and debt distress, lagged behind, with an increase of 8.6%.
Asian market leadership
The Emerging Markets IT Sub-Index has risen 63% this year, while the S&P 500 IT Index has risen 23%. The profit forecast for the Emerging Markets Index was also raised by 128%.
Although capital flows and market dominance are shifting away from AI stocks, technology companies continue to show strong profit momentum. TSM.US gave a better-than-expected profit outlook, encouraging analysts to further raise their forecasts. However, since the update, the stock price has declined as investors have fled the overcrowded AI sector.
Robert Ness, portfolio manager at Nordic Investment Management, said: “Clearly, there are growing concerns about the sustainability of AI investments.” “However, I am particularly interested in the fact that earnings expectations are still extremely strong, yet stock prices have collapsed.”