Auto companies, clothing retailers and appliance makers are posting the fastest profit growth in emerging markets, fueling a rally in developing-nation consumer shares after they fell to the cheapest level in three years.
Second-quarter earnings in the MSCI Emerging Markets Consumer Discretionary Index (MXEF0CD) climbed an average 27 percent, leading gains for the first time since 2010, data compiled by Bloomberg show. PT Astra International (ASII), Indonesia’s biggest car seller, reported a 17 percent advance while Arcelik AS (ARCLK), Turkey’s largest maker of washing machines, said profit rose 22 percent. Cia. Hering (HGTX3), Brazil’s second-largest apparel chain, and Zee Entertainment Enterprises Ltd. (Z), India’s biggest listed broadcaster, beat analysts’ estimates.
The results signal interest-rate cuts in developing nations are spurring shoppers to buy non-essential items, which policy makers from Brazil to China are counting on to boost economic growth from the weakest pace since 2009, according to Prudential International Investments Advisers and GLG Partners. Profit gains are accelerating at emerging-market consumer companies even as growth for advanced-market peers slows.
“Earnings should be resilient” for developing-nation consumer discretionary companies, Bart Turtelboom, the London- based co-head of emerging markets at GLG Partners, which oversees about $26 billion, said in e-mailed comments Aug. 14. “Valuations are at the lowest we have seen in a while, which makes the sector very attractive at current levels.”
Emerging-market investors have their biggest overweight position in consumer discretionary companies, meaning they own more of the stocks than are represented in benchmark indexes, according to a Bank of America Merrill Lynch survey of money managers who oversee about $277 billion this month.
Arcelik climbed 1.6 percent to a record in Istanbul trading today, while Hering slipped 0.2 percent at 12:12 p.m. in Sao Paulo. Astra dropped 0.7 percent and Zee Entertainment retreated 1 percent.
The MSCI index fell to 11.5 times profit on July 23, the lowest level since March 2009. The gauge’s price-earnings ratio dropped to a record in June versus the MSCI Emerging Markets Consumer Staples Index, a measure of household-products makers, beverage companies and food producers such as Want Want China Holdings Ltd. (151) and BRF - Brasil Foods SA (BRFS3), whose earnings are less tied to economic growth.
The discretionary measure was valued at 12.8 times profits yesterday, a 19 percent discount to its five-year average. That compares with 17.8 times for the MSCI World Consumer Discretionary Index. (MXWO0CD) The developing-market gauge has rallied 8.2 percent during the past month, topping the 4.5 percent gain for the MSCI Emerging Markets Index. (MXEF)
The discretionary index remains 4.7 percent below its level when emerging-market central banks, led by Brazil, began lowering interest rates in August 2011. The index surged 136 percent in 12 months after borrowing costs started falling four years ago.
The average policy rate in 15 developing nations tracked by Bloomberg has dropped by 44 basis points, or 0.44 percentage point, during the past year to 5.4 percent. That compares with benchmark borrowing costs near zero in the U.S. and 0.75 percent in the euro area.
“One of our big themes is lower interest rates in the emerging markets in the second half of the year and that really points towards improving performance by consumer discretionary names,” Geoffrey Dennis, a New York-based emerging-market equity strategist at Citigroup, said in an Aug. 8 interview with Bloomberg TV India.
Slower economic growth may curb discretionary spending in emerging markets during the next 12 months, according to Arjuna Mahendran, the head of Asia investment strategy at HSBC Private Bank.
China’s expansion has decelerated for six straight quarters, while retail sales slowed for five consecutive months through July amid a government crackdown on property speculation that reduced home prices.
Brazil’s gross domestic product expanded 0.75 percent in first quarter, the weakest pace since September 2009. The nation’s consumer default rate hit a 30-month high of 7.9 percent in May, while consumer debt in Brazil increased 16 percent in the year through June to a record 546 billion reais ($270 billion), according to the central bank.
Brazilian consumers are “over-leveraged and under pressure,” Michael Shaoul, the chairman of Marketfield Asset Management, said at the Bloomberg Brazil Economic Summit in Rio de Janeiro on Aug. 14. “The banking system is clearly trying to walk away from the consumer.”
Higher food prices may fuel inflation and reduce the scope for further interest-rate cuts, said Michael Ganske, the head of emerging-market research at Commerzbank AG in London.
Corn rose to a record on Aug. 10 after droughts from the U.S. to Europe and Australia damaged crops. The S&P GSCI Agriculture Index has jumped 30 percent during the past two months as wheat and soybeans also surged. Food prices account for about 27 percent of consumer price indexes in emerging markets, compared with 16 percent in developed nations, according to Bank of America.
“It’s difficult to justify discretionary really catching up in the short term,” said Mahendran, who helps oversee about $500 billion from Singapore.
While consumer purchases in emerging markets have slowed this year, they’re still increasing at a faster rate than GDP. China’s retail sales growth of 13.1 percent in July compares with a 7.6 percent gain in second-quarter GDP. Brazilian retail sales are climbing more than 10 times faster than the nation’s economy, while Indonesian purchases are advancing twice as fast.
The 27 percent average profit gain for companies in the MSCI emerging discretionary index that reported second-quarter results so far compares with an 8.3 percent increase the previous quarter, according to data compiled by Bloomberg. Earnings growth in the MSCI World discretionary gauge has slowed to 13 percent from 23 percent, the data show.
Astra’s second-quarter revenue advanced 32 percent, compared with an average gain of 11 percent for global peers, according to data compiled by Bloomberg. At least four brokerages, including Sydney-based Macquarie Group Ltd., upgraded the stock this month after the results.
The Jakarta-based automotive retailer, which sells Toyota Motor Corp. (TM:US) cars and Honda Motor Co. (7267) motorcycles in Indonesia, is benefiting from record low benchmark interest rates and GDP growth that unexpectedly accelerated last quarter to 6.37 percent. The stock is valued at 16 times earnings, down from 18 times at the start of the year, according to data compiled by Bloomberg.
Arcelik, which makes household appliances from vacuum cleaners to refrigerators, recorded the fastest profit growth since 2010 last quarter. The Istanbul-based company’s revenue jumped 37 percent, triple the 12 percent average pace for global peers, according to data compiled by Bloomberg.
“The demand for big-ticket items like cars and white goods is likely to pick up,” John Praveen, the chief investment strategist at Prudential International Investments Advisers, a unit of Newark, New Jersey-based Prudential Financial Inc., which manages about $960 billion, wrote in an e-mailed response to questions. Praveen has an overweight position in emerging- market consumer discretionary shares.
Zee Entertainment, the Mumbai-based broadcaster of Bollywood movies and TV shows including “Dance India Dance,” reported a 28 percent earnings gain, beating the average of analysts’ estimates by 11 percent. The company, which gets revenue from subscriptions and advertising, will probably boost profit by 19 percent this year and next, according to 29 projections compiled by Bloomberg.
Hering, based in Blumenau, Brazil, is valued at 23 times profit, a 20 percent discount to its average during the past two years. The seller of Hering and PUC brand clothing posted a second-quarter earnings gain of 10 percent, and analysts predict annual growth will average more than 15 percent the next three years.
The percentage of delinquent consumer loans in Brazil fell in June for the first time in three months. Retail sales unexpectedly rose 1.5 percent from a month earlier, the most since January. The central bank cut interest rates eight times since last August.
“We still like the consumption theme because of the rising income for most of the emerging markets,” said Daphne Roth, who helps oversee about $200 billion as the Singapore-based head of Asian equity research at ABN Amro Private Banking. “Some of the consumer discretionary stocks are still quite cheap.”
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