Ahead of the Game

February 02, 2023 | Akwasi Sarpong, Associate Research Analyst

Heightened inflation and pressure on central banks to raise rates were common themes around the world in 2022. As rate hiking cycles weighed on equity markets, emerging markets that were quicker to respond to elevated inflation with higher rates earlier on began to stand out as a relative bright spot. Inflation is receding in these countries and a lack of headwind from continued rate increases could position emerging markets for strength relative to developed markets. The relative differences in central bank policy are reflected in earnings estimates for the two asset classes. Emerging markets estimates were the first to be revised lower and are now up off November 2022 lows. Developed markets, on the other hand, with the delayed impact of higher rates and a fairly resilient consumer, are only starting to see downward revisions now. This week’s chart compares earnings revisions for emerging markets and developed markets. Figures above zero indicate the revisions ratio — upward revisions less downward revisions as a percentage of earnings estimates — is higher for emerging markets and figures below zero mean that the revisions ratio is higher for developed markets. With emerging markets earnings revisions potentially on an upward track, along with multiples at historically attractive levels, the asset class may be set up for relative strength from here.

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