Earnings are key for equity investors, as also my colleague Harald Egger emphasized in this blog two weeks ago. This basic truth is even more relevant as usual at a time when a multi-year equity bull market has ended and a wobbly global economic backdrop is weighing on market sentiment. In this situation, corporate earnings can provide important clues whether current market turbulences are mostly reflecting top-down anxieties or something more fundamental in the corporate sector is going on, which will put pressure on valuations.
In an interview with Péter Varga, Senior Fund Manager Erste Asset Management, I am discussing the chances and risks with investments in emerging markets corporate bonds. Many Investors feel unsettled by the weak performance of the emerging markets. Why is this the case?
Growth is weak, and the downside risks are elevated. However, in a pre-emptive move, the market has already priced in the materialisation of some of the risks. The current development would not immediately suggest it. A short-term phase of recovery on the equity markets would fit this picture.
The past days and weeks have not been easy. The market participants feel unsettled, and pessimism has been on the rise. While the former is justified, we regard the degree of pessimism as overshooting, at least in the short run. The market now has a drastic and imminent economic weakening, i.e. a partial materialisation of the existing risks, priced in.
The international stock exchanges recorded a rather dismal start into the new year. The reasons cited most frequently were China and the declining oil price. A weaker Chinese economy will definitely register also on an international scale due to the mere size of the country. While a weaker oil price is beneficial to consumers, it does cause significant levels of stress in the energy sector as well as among banks that provide credit to the sector.
A factor that has hitherto been more or less disregarded is the general earnings situation of listed companies. Therefore we want to take a closer look at this topic in this article. Without earnings growth, there can be no sustainable rise in share prices.
Earnings cycle has peaked out
In the developed markets equity universe the earnings cycle peaked out in February 2015. Since then, earnings have been on a slow but steady decline.
The losses on the stock exchanges and in other risky asset classes unsettle investors. The additional expansive signals sent by the central bank support markets, albeit only by a minor degree. From an economic perspective there are no convincing signs for a trend reversal. The current correction is due to permanently low growth and to the risk of further deterioration.