Investors in emerging markets finally get rewarded for earnings

- Investors in emerging-market stocks are finally getting rewarded, as promising signs for company earnings prompt the longest weekly rally since June.

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None One of California s wealthiest counties could run out of water next summer.

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For the first time in three years, developing-nation companies are beating profit forecasts, with average earnings coming in 3.6% above analysts projections, according to data compiled by Bloomberg. That helped to deliver a third week of gains for the MSCI Emerging Markets Index. Traders are now awaiting results from index heavyweights including Samsung Electronics Co. China Construction Bank Corp. and Sberbank of Russia, all scheduled to report this week.

It s a key moment for emerging equities, which have struggled with risks ranging from Chinese regulatory crackdowns to the threat of stagflation. The index was little changed on Monday as traders weighed inflation risks and a Covid 19 outbreak in China.

Investors that track the MSCI index are barely breaking even, with the gauge poised for its worst annual performance since 2018. But a strong earnings season could make all the difference.

For Malcolm Dorson, whose emerging-market stock fund has outperformed 94% of peers over the past three months, the prospects for certain sectors look particularly good.

Vaccine rates picked up and economies reopened, which should be positive for consumer earnings, said Dorson, a money manager at Mirae Asset Global Investments in New York. Emerging-market interest rates picked up and provisions came down, which should be a positive for bank earnings. And commodity prices have surged, which should be positive for energy and materials earnings. While weakness from South Korea's Samsung was one of the top contributors of negative returns for the MSCI gauge in the third quarter, preliminary results from the technology company have already set the stage for a solid quarter. China Construction Bank s earnings are expected to show a 10% climb in 2021 after a 1.6% gain in 2020, and consensus forecasts for Russia s Sberbank revenue rose by about 3% in the past three months, with further upgrades possible. The three companies are among the top 20 holdings for MSCI s equity gauge.

Tension still lies in the results of Chinese companies, which have been hit particularly hard by anxiety over the government s regulatory tightening and concern over Evergrande s debt troubles. Stocks from the world s second largest economy make up about 31% of the developing-nation benchmark, making their performance critical for broader emerging markets.

Goldman Sachs expects the MSCI EM index to reach 1,475 points in the next 12 months, or 11% higher in developed currency terms, largely in line with gains forecast for local markets. The firm is focused on shares that will benefit from emerging reflation trends in domestic markets outside of northern Asia.

We are comforted to see these parts of the equity market with very steady earnings-per-share growth and performance in recent months despite macro headwinds from the U.S. interest rate policy and Chinese property market, Goldman strategist Caesar Maasry said in a note.

What are the key data to look out for this week:

None South Korea and Taiwan will release third-quarter GDP data on Tuesday and Friday, respectively. Both are expected to report a slowdown in the annual pace compared with the prior quarter as a fresh wave of virus crimped activity, although both continue to enjoy robust exports.

None China will report manufacturing PMIs on Oct. 31, which may indicate whether the slowdown in the world s second largest economy is gathering momentum. Growth eased in the third quarter amid an energy crisis and a property slump. The yuan has remained resilient this month.

None Brazil is expected to raise its key Selic rate by 125 basis points on Wednesday, to 7.5%. Analysts at UBS BB and Barclays Plc forecast a 150 basis-point hike.

None of Colombian policy makers will likely increase interest rates by a quarter-point on Friday to 2.25%.

None of Egypt s central banks is set to hold its benchmark at 8.25% on Thursday, with investors drawn to one of the world s highest inflation-adjusted rates.

None Russia will release September industrial production figures on Wednesday and unemployment data on Friday.

None Colombia s Rain Shaman Got Paid to Stop the Storms, Until He Couldn t Stop The Storms.

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