Light speed is too slow.
That's right, Spaceballs fans (who also happen to be emerging market investors): we are now going to ludicrous speed.
Emerging market earnings growth forecasts for 2017 are surging higher, according to UBS. Based on the UBS GEM Inc/GEM Banks Inc database, their latest earnings-per-share (EPS) estimate for 2017 is 25.6%...in dollars. That's up from 15.6% three months ago. If banks are excluded, then their EPS forecast is 31%.
"This could be the best year for emerging market earnings since 2010," says Geoff Dennis, a Boston-based strategist for UBS.
Why does this matter? Well, to the multi-trillion dollar U.S. financial industry it matters. There's billions of dollars in American pension funds, 401k plans and individual investment portfolios at places like the neighborhood Ameriprise Financial to Wall Street titans like BlackRock. All of them are faced with where to put money to work every day. The U.S. is looking expensive, even assuming for Trump's latest plan to reduce the corporate tax rate and lower taxes on repatriation of dollars held overseas by U.S. companies. Meanwhile, the rest of the world looks cheap. For much of the past 10 years, the U.S. has been the only game in town. But as investors start looking elsewhere, money will start returning to emerging markets. Indeed, it already has, according to EPFR Global, a fund tracking firm that has been noting weekly increases to India and emerging market bonds.
UBS says that the three biggest sectors looking to make a killing this year are energy, materials, and IT. Dennis says higher commodity prices, a stable-to-lower dollar, and increased global trade all help explain the uptick in corporate earnings.
The U.S. is currently going through its own earnings season. But foreign firms, many of them brand names like Samsung, are expected to outdo their American counterparts.
Dennis expects corporate revenue growth of 11.1% in 2017, up 70 basis points from early 2017 estimates. The biggest return on equity is expected in Brazil, Mexico, Korea, South Africa and Turkey.
Emerging market dividend yield is expected to be only a little higher than their U.S. counterparts, averaging around 2.7% in 2017. If UBS is right, and companies south of the border and across the sea beat consensus in their earnings releases, then there is room for higher dividend payouts in Korea, South Africa, Mexico and Brazil, namely in the IT, real estate, consumer staples, telecom and healthcare segments.
Emerging market banks are now an overweight.
According to the UBS GEM Banks Inc database, 2017-18 EPS growth forecasts of 8.1% to 8.6% are similar to the 8.3% posted in 2016. However, dividend growth at those banks is set to outpace EPS growth with an increase from 4.2% to 5.8% in 2017.
UBS Earnings Estimates
Source: GEM Inc -- April 2017, UBS estimates
Turning to regions and countries, EPS (ex-financials) growth in Latin America is expected to remain in the triple-digits in 2017, led by Brazil and Mexico. This is one of the reasons why the MSCI Latin America right now is more expensive than MSCI Asia, long seen as the emerging market growth driver.
Brazil EPS growth is expected to rise triple digits this year before falling down to earth in 2018. Latin America earnings growth is expected to rise a whopping 231% based on UBS metrics. By comparison, Asia EPS growth is seen going up a healthy 21.9%, led by Korea in percentage terms, not China.