Corporate profit growth has seen a steady improvement in recent times. However, one should be cognizant of earnings growth being only one of the drivers of stock returns, the other being price/earnings (PE) multiple expansion. The graph below, courtesy of BCA Daily Research, shows emerging market multiples are back at pre-crisis levels, suggesting the upside potential could be limited for now.
In short: In the absence of much scope for a further increase in PEs, especially with interest rates in many developing countries bottoming out, emerging stock markets require sustained earnings growth to take prices to higher levels. This is no longer a “dart board” market and individual country selection has again become key.
Source: BCA Daily Research, May 13, 2010.
