(August 7, 2012) — The profitability of companies based in emerging market economies has dramatically slowed and short-sellers are poised to take advantage, research from several quarters has shown.
Sales growth in emerging markets is estimated to trail both Europe and Japan this year, according to the CROCI equities team at Deutsche Bank. Manufacturing data from countries in this group has indicated a slowdown in production, data monitor Markit also said this week.
The major driver of this slump has been the fall in the demand for materials for use in construction, and energy from the wider economy that has been suffering a financial crisis.
Research from Deutsche Bank’s CROCI team said corporate profitability in emerging markets was collapsing. This means companies that had reacted to earlier demands for their products by investing back into their business would suffer the most as products remained on the shelf.
A report from the team said: “Overinvestment and fading competitive advantages have led to poor earnings growth. Companies that are able to increase and/or sustain their cash returns would fare better.”
Short-sellers have bought into the view that large sections of corporate emerging markets will be underutilised as long as the crisis drags on in Europe have begun to pick out stocks they think are set to fall.
A report from Markit said: “Across the Asian materials sector, demand to borrow is up 65% over the past 12 months with the most shorted [companies seeing 14% of their available shares out on loan]. Clearly, many investors are buying this argument and will profit from further weakness in steel, aluminium and cement demand.”
Over the longer term, however, some believe emerging markets offer better prospects than developed markets due to most of them holding lower levels of national debt.
Jerome Booth, head of research at emerging market specialist asset manager Ashmore, said this week: “Having most investments in heavily indebted developed countries (HDICs) is equivalent – given the 250% private plus public debt/GDP and thus high contagion risk – to putting all ones eggs in the same stack of baskets piled one on top of another. Emerging markets – with private plus public debt/GDP 25% – have less contagion risk than the HIDCs.”