Mark Mobius Sees EM Corporate Earnings Growth Rebounding After Inflection Point In 2016 3

Mark Mobius sees emerging markets as the next growth vector

Clearly, gone are the days when the world viewed the emerging markets as third-world countries. As legendary billionaire investor, Mark Mobius, executive chairman of Templeton Emerging Markets Group, likes to put it, emerging markets are the next growth vector. Mobius finds evidence in GDP growth figures; emerging markets (EEM) (VWO) (IEMG) are currently growing at 2-3 times their developed market (EFA) (VEA) counterparts.

Agreed, growth rates in stabilized developed economies tend to maintain sustainable long-term rates of expansion, while those for emerging markets tend to stand high given the state and pace of development in these economies. However, Mobius’ investment case for emerging markets rests on earnings growth and valuations. From a valuation perspective, emerging markets are 20% cheaper than the developed markets.

Emerging market earnings are in their early innings

Moreover, according to the investment mogul, markets are still in “the early innings of the emerging-market earnings growth upturn.” Factors such as low debt, stabilizing commodity markets, reduced currency volatility and improving consumer confidence have served as key factors driving market confidence. Most importantly, emerging markets corporate earnings growth hit an inflection point in 2016 (see chart below), believes Mobius.

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The chart above depicts the past 5-year trend in trailing and forward EPS (earnings per share) ratios of the MSCI Emerging Markets Index. The MSCI emerging markets index is the most widely used barometer for gauging emerging market corporate performance; often used as a benchmark for relative valuations.

From an 80+ (trailing) EPS during 2012-13, weaker commodity prices and slowing growth in China (FXI) dragged corporate earnings growth down to their lowest 5-year level (~50) by mid-2016; which is when they hit their inflection point. Since then, EM corporate earnings, as adequately reflected in their earnings-per-share, have been rising. Currently, the trailing EPS for the emerging markets has risen close to 70. Forward EPS, which is more indicative of market expectations, stands at about 80, implying that EM corporate earnings have room to grow further (trailing at 70 vs. forward at 80).

What’s driving growth?

Capital allocation and cost efficiencies at emerging market corporations have also been improving, and this should support profit margins and lift return on equity going forward, according to Mobius. Favorable demographics are yet another pillar over which the case for emerging markets growth rests strongly. The long-term view for investing in developing countries should definitely take this factor into account.

Within emerging markets, Mark Mobius is currently more enthusiastic about 2 sectors in particular. Part 2 of this series provides insight into these.

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