Tech emerges as driver of emerging markets equities
The sector now accounts for close to 28 per cent of the MSCI Emerging Markets Index versus 18 per cent for developed markets. In comparison, the energy sector represents only seven per cent of the MSCI Emerging Market Index, its lowest level since 2001. Breaking down the MSCI Emerging Market Technology Index by geography, it was noted that 99 per cent of the index consists of Asian companies, predominantly from China, Korea, and Taiwan.
From a performance perspective, the 54 per cent gain in 2017 the in the MSCI Emerging Markets Technology Index (versus 34 per cent for MSCI Emerging Markets Index) was driven by Alibaba and Tencent, both Chinese companies, and Taiwan Semiconductor.
In spite of these developments, forward earnings have not seen a marked uptick within the emerging markets technology sector, trading at 14 times forward earnings currently compared to 13.5 times in 2016. Globally, emerging markets are trading near their historical average at about 1.6 times price to book value.
Earnings revisions have been weaker in emerging markets during the first quarter 2018, absolute earnings growth expectations remain strong (+16 per cent for 2018 after +24 per cent in 2017). MSCI Emerging Markets Index has edged up +0.90 per cent year to date. So far in 2018, technology sector weakness has not been the only theme within emerging markets. The stronger USD, rising interest rates, and fears of potential trade disputes have all played their part in weighing down on emerging markets performance. A stronger USD and higher interest rates have started to affect liquidity in emerging markets, particularly in countries with weak current accounts such as Turkey, India, South Africa, and Argentina. Further USD appreciation would increase headwinds for earnings growth and could constitute a key risk for emerging markets.