Companies on the MSCI Emerging Markets (EMs) Index are currently in their longest-ever earnings recession, according to Morgan Stanley, but cheap valuations continue to lure brave investors in.
"Looking at a history of earnings per share (EPS), this month marks the fourth anniversary of the earnings recession that began in August 2011," Jonathan Garner, Morgan Stanley's chief Asia and emerging markets equity strategist, said in a video posted by the bank on Monday.
EPS have dropped 25 percent from their August 2011 peak, Garner said, pointing to MSCI data. The longest prior earnings recession among emerging markets was the 1997 Asian Financial Crisis, which lasted two years, he added.
But, while the ongoing reporting season is only about a third completed, Garner believes another significant miss is on the table. A 7.3 percent miss on net income is expected for the April-June quarter, he said, compared to a 10.2 percent beat for Japanese companies listed on the Topix and a 4.6 percent beat for S&P 500 firms.
A combination of falling commodity prices, fears about China's slowdown and anticipation of higher U.S. rates are amounting to "something of a perfect storm" for emerging markets, the Institute of International Finance (IIF) explained in a note last Thursday, providing similar data to Morgan Stanley.
Twelve-month forward EMs earnings are seen declining 14 percent on year in 2015, compared to a 1 percent fall in the U.S. and the euro area's 4 percent spike, IIF said. At a forward price-to-earnings of 11 times, EMs are close to a record discount versus mature market equities that are now trading at over 17 times forward EPS, it added.
"Corporate profit and currency trends are working against the asset class," echoed Ewen Cameron Watt, global chief Investment strategist at BlackRock Investment Institute said in a Monday note.