Despite geopolitical tensions impacting global markets, earnings forecasts for emerging market companies have reached record highs as investors bet on the profit resilience of leading Asian artificial intelligence firms. Analysts have raised profit expectations for constituents of the MSCI Emerging Markets Index by 23%, marking the fastest pace of upgrades since the global economy's strong recovery from recession in 2009. Data compiled by the market shows that even after the outbreak of conflict, earnings estimates have continued to climb, increasing by nearly six percentage points over the past six weeks. This implies earnings per share (EPS) growth of close to 50% for emerging markets over the next 12 months, with profit levels set to reach new records. Currently, emerging market equities remain approximately 3% below pre-conflict levels. However, strategists from institutions including Citigroup and Goldman Sachs Group believe the earnings upgrades will lay the groundwork for a robust market recovery in the coming months. Citigroup noted that rising forward EPS expectations are making the risk-reward profile for equities attractive again, and the bank increased its holdings in South Korean stocks last week.
This optimistic outlook is largely driven by Asian technology companies that supply hardware for AI networks to Silicon Valley firms. Financial reports from Samsung Electronics and Taiwan Semiconductor Manufacturing Company indicate that demand for AI chips remained strong even in the initial weeks following the conflict. "The driver behind this is, of course, capital expenditure from US hyperscale companies," said Archie Hart, a portfolio manager at Ninety One UK Ltd. "This is effectively an AI gold rush, and Asia is manufacturing the 'picks and shovels' for US large language models and hyperscalers." Hart pointed out that while South Korea, Taiwan, and mainland China account for the majority of the earnings upgrades, the trend is also spreading to industrial sectors supplying equipment for AI and defense infrastructure. Concurrently, commodity and energy stocks have also seen upward revisions, with the latter benefiting from rising oil prices.
Goldman Sachs strategists project overall emerging market corporate profits to grow by 23% this year, and even excluding South Korea and Taiwan, growth is expected to reach 12%. In a client report, they indicated that, combined with relatively light investor positioning and low equity valuations, there is "room for recovery" as hostilities subside, naming Brazil, South Africa, and South Korea as the markets most likely to benefit. However, this optimism could fade if the Strait of Hormuz does not reopen swiftly and an initial two-week ceasefire agreement is not extended. Manik Narain, head of emerging market strategy at UBS Group, stated that consensus earnings expectations have not priced in the risk of weaker economic growth. He suggested that if the conflict persists into April, EPS estimates could be revised down by approximately 10%. Narain wrote that this would leave emerging market equities trading at a price-to-earnings ratio slightly above the average, which in the current context of higher US yields "does not look cheap." Ninety One's Hart also concurred that the current bright earnings outlook could be upended if oil prices remain at elevated levels, sparking concerns about inflation, borrowing costs, and economic growth. "If the preliminary ceasefire in the Gulf fails to hold and conflict reignites, it could drag the global economy into a recession, invalidating all current earnings bets," Hart said.
Comments