Markets Grapple with Decline
Weekly Market Snapshot
- Markets Experience Setback Amidst Sector Variations and Economic Factors
Behind the Headlines: What happened?
The MSCI Emerging Market Index experienced a setback last week, sliding by -2.10%, a dip that contrasted sharply with the 1.27% gain observed in the prior week. This downturn sent shockwaves rippling through all sectors, but the real estate sector managed to defy the trend, posting a return of 0.74% which rebounded from the -2.27% return recorded in the previous week. However, the frontier markets continued to give up gains amid a negative week-on-week decline. The market’s return declined to -1.15% in the week ending on September 22nd, 2023, compared to -1.03% recorded the previous week. The real estate and industrial sectors dragged down the index’s return with disappointing -4.40% and -2.41%, respectively.
Source: Factset
The frontier markets’ Communication Services returned -2.18%, compared to 0.06% of returns recorded in the previous week. The decline in the sector is attributable to general economic conditions, consumer spending, and inflation.
The emerging market index has experienced a 3% decline during this quarter. This setback comes after a strong start to the year, as the momentum waned due to China’s uneven economic rebound and apprehensions regarding potential interest rate hikes following signals from the Federal Reserve, indicating the possibility of another increase later in the year.
The Inside Scoop:
In emerging markets, Emaar Properties led the pack with an impressive return of 9.79%, Standard Bank Group followed closely with a return of 6.87%, Ecopro Co., Ltd. with a return of 6.65%, while Wal-Mart de Mexico SAB de CV returned 5.58%. However, China Construction Bank Corporation Class H lagged with a modest return of 1.24%.
Source: Factset
In the frontier markets, Stanbic IBTC led returns with 12.49% while Duc Giang Chemicals followed suit with 7.43%. The National Atomic Company also returned 7.01% with the highest contribution to return of 0.15%, Banca Transilivania, Krka d.d joined the top contributors with 4.37% and 2.29% respectively. The National Atomic Company continued its impressive return contribution as uranium prices surged to $66.25 per ounce. The Kazakhstan-based Energy Company controls about 40% of world uranium supplies. Nigeria’s Stanbic IBTC also joined the top contributors as the financial sector continued its impressive performance amidst the country’s macroeconomic crisis.
Source: Factset
However, Vietnamese companies such as Vingroup, Vinhomes JSC, and Vietnam Dairy Products contributed the least, with -7.05%, -5.39%, and -2.96%, respectively. This decline was due to a challenging external environment and weaker domestic demand, leading to an economic slowdown.
Connecting the Dots:
The outlook for emerging markets remains positive, driven by strong economic growth, rising commodity prices, and improved corporate profitability. This has led to an increase in Free Cash Flow (FCF) for companies in these markets compared to their historical performance. Looking at the key metrics, the Price-to-Cash Flow ratio for emerging markets declined to 6.22x last week from the prior week’s close of 6.33x. However, it’s important to note that this figure remains higher than the average 6.24x we’ve seen throughout the year. Notably, companies like Samsung Electronics and TSMC have contributed significantly to this trend, with Samsung generating a free cash flow of KRW 61.2 trillion (approximately US$45.5 billion) in 2022, and TSMC producing a free cash flow of NT$537.2 billion (approximately US$17.8 billion) in the same year.
Additionally, the Price-to-Earnings (P/E) ratio for the MSCI Emerging Markets Index currently stands at 12.06x, which is slightly above the historical median of 11.64x. It’s worth emphasizing that there are significant variations in valuations across different sectors within these markets. Optimism continued to wane in the frontier market, and the Price-to-Earnings ratio has continued to decline since September 1st, 2023. The market’s P/E ratio stumbled at 9.88x compared to 10.00x reported for the week ending on September 15th, 2023. In addition, the P/E ratio compared to its September average of 9.99x indicated that the market is undervalued as returns continued to plummet on a week-on-week basis. The emerging market posted a P/E ratio of 12.06x compared to the frontier market’s 9.88x.
The Bottom Line:
The decline in the frontier markets’ returns and performance across both countries and sectors underlined the continuous undervaluation of the market. The markets continued to grapple with tightened global financing conditions and tough macroeconomic conditions. The overall market sentiment may become positive if inflation is decelerated to support private consumption and increased investment to boost confidence and improve performance across sectors.
Looking ahead, the markets are eagerly anticipating the release of U.S. inflation data later this week, which could have significant implications for financial markets. In the context of emerging markets, all eyes are also on the upcoming interest rate decisions from Hungary, Mexico, and Colombia. These decisions will undoubtedly be closely monitored, as they have the potential to influence market sentiment and capital flows within emerging markets.
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