Ahead of the Game

February 02, 2023

Column chart comparing downward revisions between emerging markets and developed markets. Chart subtitle: Emerging markets saw downward revisions earlier than developed markets, potentially setting the asset class up for relative strength from here. Chart visual description: Data is monthly and as of December 31, 2022. Y-axis is labeled “EM – DM” and ranges from -40% to +30%. X-axis is labeled yearly, from 2002 to 2022. Columns above the x-axis on the chart represent EM greater revisions and are in purple; columns below x-axis represent DM greater revisions and are in tan. Chart data description: For time periods shown, DM category has historically experienced greater revisions more often; EM only charted during short periods in 2003, the majority of 2007-2009, a blip in 2019, and 1H2020. Chart source: MFS Institutional Advisors, FactSet as of December 31, 2022. Earnings revisions ratio = upward revisions – downward revisions (CY1, based on mean broker estimates) divided by total measured with a three-month rolling window for MSCI Emerging Markets companies and MSCI World companies. End chart description. See disclosures at end of document.

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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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

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