Emerging-market companies are disappearing from the ranks of the world’s biggest stocks.
For the first time since 2005, only one developing-nation company, PetroChina Co. (857), is among the top 20 by market value as equity investors pull money out of the countries. The state-controlled oil producer fell to 14th from fourth a year ago, while Industrial & Commercial Bank of China Ltd. sank to 22nd yesterday after losing $38 billion of value. Samsung Electronics Co. (005930), South Korea’s largest company, dropped 11 spots to 27th.
Less than two months into 2014, investors have withdrawn more than $10 billion from emerging-market exchange-traded funds, exceeding the $8.8 billion of outflows last year. Developing nations’ growth advantage over advanced economies has narrowed to the smallest in 11 years while policy makers from Turkey to India have raised interest rates to stem currency losses. Money is flowing into U.S. and European companies, which tapped recoveries in their own economies to produce higher returns on equity than emerging-market peers.
“There is more downside” for emerging markets, Joseph Quinlan, the chief market strategist at Bank of America Corp.’s U.S. Trust, which oversees about $376 billion in client assets, said in a phone interview from New York. “Can they face up to world-class competitors from the U.S., Japan and Europe? I’m not convinced that at the micro level, the emerging markets are up to the task.”
Last year’s developing-nation ETF outflows were the first ever recorded, following a decade in which they attracted more than $110 billion, according to data compiled by Bloomberg. The MSCI Emerging Markets Index dropped 0.2 percent at 11:05 a.m. in New York, while the MSCI World Index gained 0.1 percent.
The investor skepticism that surrounds emerging-market companies is a turnaround from six years ago, when they made up eight of the 20 biggest stocks by market value and looked unbeatable. PetroChina (856)’s market value topped $1 trillion in November 2007 as emerging market price-to-earnings ratios surpassed those of developed-nation peers. The chief executive officer of OAO Gazprom predicted the Russian energy producer would reach the same level as its Chinese counterpart by 2015.
Gazprom has since shrunk to less than $100 billion, while PetroChina lost almost 80 percent of its market value as economic growth rates slowed and government interference deterred minority investors. Emerging economies probably expanded at a 4.5 percent pace last year, versus 1.2 percent for advanced countries, the smallest gap since 2002, according to the International Monetary Fund.
“People looked at the quantity and didn’t look at the quality,” said Mark Matthews, the Singapore-based head of Asia research for Bank Julius Baer & Co. “Starting around 2009, people focused more on the quality of the economic and earnings growth in places like China and India, and they realized it wasn’t as strong as they thought.”
The underperformance of emerging markets has become more pronounced this year as reduced Federal Reserve stimulus rattled the currency markets of countries with current-account deficits, while a slowing Chinese economy clouded the outlook for commodity producers.
Turkey’s benchmark equity index has retreated 5.3 percent this year after the lira plunged to record lows last month. The Hang Seng China Enterprises Index sank 9.4 percent, including a 1.4 percent retreat yesterday, on concern reduced lending to the property industry will undermine growth in the world’s second-largest economy.
The Standard & Poor’s 500 Index (SPX), the benchmark gauge of U.S. equity, briefly reached a record yesterday amid speculation the economy is strong enough to weather a reduction in monetary stimulus. American companies now account for all five of the world’s biggest companies by market value, with Exxon Mobil Corp. (XOM:US), Google Inc. (GOOG:US), Microsoft Corp. (MSFT:US) and Warren Buffett’s Berkshire Hathaway Inc. (A:US) following Apple Inc. (AAPL:US) at the top of the rankings.
The World Bank raised its 2014 growth forecasts for advanced nations last month to 2.2 percent from 2 percent, while cutting its estimates for developing nations to 5.3 percent from 5.6 percent.
“In the short term, the shift is justified,” said Christopher Wong, a Singapore-based money manager at Aberdeen Asset Management Plc, which oversees about $321 billion. “Developed markets seem to have a better headline story than the emerging markets.”
Some of the best-performing developing-nation companies are still too young to break into the ranks of the world’s biggest stocks, said David Gaud, a senior money manager at Edmond de Rothschild Asset Management, which oversees about $120 billion.
Tencent Holdings Ltd. (700), which listed in Hong Kong in 2004, has already climbed to become Asia’s biggest Internet firm and the world’s 41st-largest company by market value. The operator of the WeChat messaging service has boosted earnings by more than 20 percent annually in the three years through 2012 and analyst estimates compiled by Bloomberg show profits will double through 2016.
“It will take time” to see newer emerging-market companies reach the top of the rankings, Gaud said. “Tencent is getting bigger and bigger.”
Developing countries are expanding their influence on the global economy. They account for nine of the 20 biggest countries by gross domestic product, up from seven in 2005, and about 40 percent of world GDP, according to the IMF.
“Emerging markets is an asset class investors want to hold longer term,” said Gary Dugan, the Singapore-based chief investment officer for Asia and the Middle East at Coutts & Co., which counts Queen Elizabeth II among its clients. “The wobble is giving them the buying opportunity but people clearly get nervous when they see the volatility in the markets.”
Faster economic growth rates haven’t translated into superior profitability in developing nations as policy makers intervene into the state-controlled companies that dominate the ranks of the largest emerging-market stocks.
Earnings at Petroleo Brasileiro SA (PETR3), Brazil’s state oil producer, dropped for seven straight years through 2012 as the government capped fuel prices to contain inflation. The market capitalization of Petrobras, as the company is known, has shrunk to about $78 billion from more than $300 billion in 2008.
The MSCI Emerging Markets Index has a return on equity of about 13 percent, versus 15 percent for both the S&P 500 and the Swiss Market Index, which has three companies, including drugmaker Roche Holding AG (ROG), among the world’s top 20.
Emerging-market equity valuations have declined to the biggest discount versus developed-nation peers since the depths of the global financial crisis five years ago. The MSCI Emerging gauge is valued at 11 times reported profits during the past 12 months, compared with 17 times for the S&P 500 and 19 times for the MSCI World Index, according to data compiled by Bloomberg.
“You still have quasi-government enterprises in some of the emerging markets and the market wants to favor more flexible companies that have the ability to really drive shareholder value,” David Lafferty, the chief market strategist for Natixis Global Asset Management in Boston, which oversees about $867 billion, said in a phone interview. “The market is putting a greater premium on companies that are more broadly diversified.”
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