Emerging market stocks have performed poorly for more than a decade both in relative and absolute terms. This can be explained by a marked decline in price to earnings multiples since the very high levels achieved in 2008 and 2012 combined with poor growth in these earnings. In turn, low growth in earnings were caused by a significant deterioration in the GDP growth of most emerging markets.
We show the evolution of multiples and earnings in the following charts. CAPE multiples are at a third of the level reached in 2008 while earnings have been flat in nominal USD terms.
This remarkable result can be explained by the unbalanced growth of the global economy. While emerging markets are said to be growing GDP at a higher rate than developed markets, the growth is highly concentrated in China (and to a degree India). Emerging markets ex China and India have languished over this period. We show this in the chart below.
Given the disappointing growth of emerging markets ex China since the GFC, it is not surprising that earnings growth has been poor. What is stunning is the lack of earnings growth in both China and India, despite their high GDP growth, as shown below.
The explanation lies in the unbalanced nature of Chinese growth, which relies on the repression of the consumer to subsidize the export sector and unproductive state investments in infrastructure and industry. China’s excess capacity is increasingly dumped on emerging markets, leading to deindustrialization, low productivity and low growth.
I think I have recently seen a chart that showed no or little earnings growth for the last decade was true not only for emerging markets but also for international developed and even US ex-Tech. US Tech and US multiple expansion were the drivers of the big outperformance of the US market in the last decade.
Absolutely. The link is the high weight of industrials and commodities and the impact of a strong USD.