Wall Street\u2019s tech giants have smashed the competition in recent years
\nBut Nvidia\u2019s boom and crash week is a reminder not everything goes up forever
\nFranklin Templeton Institute analysis suggests roughed up emerging markets could provide value in the years ahead<\/p>\n
Wall Street has led the world with the best performance and earnings growth over the past 15 years, but new research from Franklin Templeton suggests that at current and historic valuations it\u2019s time to consider greater exposure to emerging markets.<\/p>\n
Investors haven\u2019t been able to get enough of Apple\u2019s new ChatGPT-infused stock, Nvidia\u2019s extra special AI (artificial intelligence) chips, nor for that fact the less magnificent but no less lunar-launching Super Micro Computer.<\/p>\n
Mega tech has been a major driver of the US stock market\u2019s boom run of records \u2013 this despite the US economy\u2019s struggle with its own central bank and the weight of high interest rates.<\/p>\n
The gains have been so stupendous the talk is turning to dotcom analogies \u2013 is there an AI bubble in the post?<\/p>\n
Has the US market lost its bearings amid the stratospheric expectations of investors?<\/p>\n
I\u2019m not going to answer that question.<\/p>\n
Not when there\u2019s a free AI application out there which can do it and not get paid for getting it wrong (or right).<\/p>\n
All we know is that Nvidia\u2019s stock fell nearly 13% in just three days this week. (Ok, it\u2019s back recouping some of those hurts already).<\/p>\n
But over the last year or so, because we\u2019ve let Nvidia go from chip maker to giant terrifying cookie monster \u2013 just one session of those losses amounted to circa US$650bn of market cap evaporation.<\/p>\n
It\u2019s a lot of money to not worry about.<\/p>\n
Other AI killers gave up some of their (easy made) killings this week, as well. Yes, we\u2019re looking at you, Super Micro Computer (SMC) which some will say \u2018crashed\u2019 circa 9% on Monday.<\/p>\n
But then, that \u2018crash\u2019 would only drag its YTD gains down to a comparatively embarrassing 190%.<\/p>\n
In 5 months.<\/p>\n
This\u00a0 kind of rotation in and out of sectors, themes and\/or stocks is totally natural and should be a healthy sign for Wall Street.<\/p>\n
But where are we rotating to?<\/p>\n
Out of Nvidia and into TSMC or Apple isn\u2019t really much of a \u2018rotation\u2019. That looks a lot more to me like a \u2018sit on this and spin.\u2019<\/p>\n
NVDA\u2019s share price movements now carry so much weight on the S&P500 that the boat looks more vulnerable than ever.<\/p>\n
Naturally, with growing returns comes growing angst.<\/p>\n
The Mega Magnificents, behind some 60% of the S&P500\u2019s returns, only serve to highlight what the other 493 companies aren\u2019t doing.<\/p>\n
There\u2019s no doubt US stocks have led the world with the best performance and earnings growth over the past 15 years, but that could all be about to change say Chris Galipeau, senior market strategist and Lukasz Kalwak, senior analyst at the Franklin Templeton Institute.<\/p>\n
According to their analysis, it\u2019s now emerging markets which have the strongest projected earnings growth ahead in the next few years.<\/p>\n
For the past decade and a half, the MSCI USA Index has produced the strongest earnings growth on the planet.<\/p>\n
Source: Franklin Templeton Institute<\/p>\n
From 2009 to 2023, reported earnings from MSCI USA companies have grown 184%.<\/p>\n
US earnings growth was better than Japan (129% earnings growth), significantly stronger than Europe (44% earnings growth), and significantly stronger than emerging markets (5% earnings growth).<\/p>\n
As a result, the US equity market has substantially outperformed Japan, Europe and emerging markets as a whole, says Chris Galipeau.<\/p>\n
\u201cThe global earnings situation is changing,\u201d he said.<\/p>\n
\u201cUS earnings should still be strong, but we think emerging markets offer even better performance potential. Equities in Japan and Europe also look stronger to us than they have in the past 15 years.<\/p>\n
\u201cValuations matter along with earnings. While earnings drive stock prices over time, prices fluctuate as estimated earnings valuations oscillate for extended periods.\u201d<\/p>\n
\u201cIn our view,\u201d Lukasz Kalwak says, \u201clong-term investors should consider various valuation methods as part of their toolkit.\u201d<\/p>\n
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The Franklin Templeton analysts suggest using another valuation method to get a line on where markets are, and where they can go.<\/p>\n
The price of stocks relative to earnings growth \u2013\u00a0 known as the PE ratio \u2013 a measurement for both historical and forward-looking comparisons.<\/p>\n
Galipeau and Kalwak have compared the current price relative to the average earnings growth of the past 10 years, as well as the price relative to expected earnings for 2024, 2025 and 2026.<\/p>\n
In the historical comparison, while all markets appear to be undervalued relative to the past 10 years, the gap is the largest for emerging markets.<\/p>\n
Source: Franklin Templeton Institute<\/p>\n
\u201cLooking forward, emerging markets also appear to have the most attractive PEG ratios relative to expected earnings through 2026,\u201d they argued.<\/p>\n
\u201cWhen comparing equity opportunities, we believe investors may be well served to consider future earnings growth along with valuation measures. Based on our comparisons emerging markets, as represented by the MSCI Emerging Markets Index, show the strongest forward earnings growth combined with the lowest valuation backdrop.<\/p>\n
\u201cRegarding valuation, emerging markets appear undervalued, whether one considers the more traditional P\/E multiple or if one also contemplates the forward price-to-earnings-growth measure (PEG ratio).\u201d<\/p>\n
Here\u2019s an illustration of current, forward price\/earnings (P\/E) multiples for the US, Europe, Japan and emerging markets relative to their 10-year average multiples.<\/p>\n\n
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Another valuation method to consider is the price of stocks relative to earnings growth, which is known as the PEG ratio. We can use this measurement for both historical and forward-looking comparisons.<\/p>\n
In FT\u2019s Exhibit 4, compare the current price relative to the average earnings growth of the past 10 years, as well as the price relative to expected earnings for 2024, 2025 and 2026.<\/p>\n
Source: Franklin Templeton Institute<\/p>\n
In the historical comparison, while all markets appear to be undervalued relative to the past 10 years, the gap is the largest for emerging markets.<\/p>\n
Looking forward, emerging markets also appear to have the most attractive PEG ratios relative to expected earnings through 2026, Lukasz says.<\/p>\n
\u201cWhen comparing equity opportunities, we believe investors may be well served to consider future earnings growth along with valuation measures.<\/p>\n
\u201cBased on the comparisons shown above, emerging markets, as represented by the MSCI Emerging Markets Index, show the strongest forward earnings growth combined with the lowest valuation backdrop.\u201d<\/p>\n
Source: Franklin Templeton Institute<\/p>\n
\u00a0<\/p>\n
\u201cRegarding valuation, emerging markets appear undervalued, whether one considers the more traditional P\/E multiple or if one also contemplates the forward price-to-earnings-growth measure (PEG ratio).\u201d<\/p>\n
The post Just in case Wall Street flames out, maybe pack your passport for emerging markets<\/a> appeared first on Stockhead<\/a>.<\/p>","protected":false},"excerpt":{"rendered":"