All Data and Information as of 02/11/2019 Market Close

• Last week, emerging market equity funds saw larger inflows than developed market equity funds for the 12th time in the last 15 weeks. Additionally, emerging market equity funds observed their 17th consecutive week of positive fund inflows last week. As investors continue the trend of favoring emerging market funds over developed market funds, we analyze the underlying sectors of each market type to identify potentially attractive investment opportunities in global emerging markets.
   
• As can be seen in the tables below, the MSCI Emerging Markets Index is trading at 12.47x its 12-month trailing earnings and 11.55x its 12-month forward earnings, both of which are more attractive levels than the S&P 500 Index, which is trading at 18.01x its 12-month trailing earnings and 15.84x its 12-month forward earnings.

S&P 500 Sector Index Multiples, Yields, and Projected EPS Growth

Source: Bloomberg

MSCI Emerging Markets Sector Index Multiples, Yields, and Projected EPS Growth

Source: Bloomberg
 

• The MSCI Emerging Markets Communication Services Index appears to be one of the most attractive investment opportunities relative to its S&P 500 counterpart.
   
• The MSCI Emerging Markets Communication Services Index trades at 23.71x its 12-month trailing earnings and 20.12x its 12-month forward earnings, both of which are slightly more expensive than the S&P 500 Communication Services Index, which trades at 18.40x its 12-month trailing-earnings and 16.03x its 12-month forward earnings. Despite more expensive multiples, strong profitability and future expected growth may explain an investment in emerging market communication services stocks.  
   
• Analysts project MSCI Emerging Markets Communication Services Index constituents to aggregately grow their EPS by 17.83% over the next 12 months and by 19.70% per annum over the next 3 years. Both of these forecasted EPS growth metrics are better than S&P 500 Communication Services Index constituents, which analysts expect to aggregately growth their EPS by 14.74% over the next 12 months and by 12.27% per annum over the next 3 years.  
   
• Additionally, MSCI Emerging Markets Communication Services Index constituents are more profitable in their bottom line relative to S&P 500 Index constituents. As can be seen in the table below, the average profit margin of MSCI Emerging Markets Communication Services Index members is 17.55% while the average profit margin for S&P 500 Index members is 15.48%. Further, MSCI Emerging Markets Communication Services Index constituents maintain an average ROE of 17.57%, which matches that of the S&P 500 Communication Services Index.

S&P 500 Sector Index ROE Dupont Breakdown

Source: Bloomberg

S&P 500 Sector Index ROE Dupont Breakdown

Source: Bloomberg
 

• Other emerging markets sectors that may look attractive relative to their S&P 500 sector counterparts include the industrials sector, the materials sector, and the energy sector. All of these sectors trade at much cheaper multiples relative to their S&P 500 sector counterparts, although it is worth noting that their expected growth and profitability metrics are mixed. In addition, there may be geopolitical and other macro risks that may support discounted relative multiples. 
   
• While MSCI Emerging Markets Industrials Index constituents are expected to grow their EPS by 20.73% over the next 12 months, which is more robust than S&P 500 Industrials Index constitents' expected 12-month EPS growth rate of 11.12%, the former is only expected to grow their EPS by 7.86% per annum over the next 3 years while the latter is expected to grow their EPS by 10.79% per annum over the next 3 years. 
   
• The story is much of the same for emerging markets industrials stocks with analysts expecting more robust EPS growth for the MSCI Emerging Markets Industrials Index than the S&P 500 Industrials Index over the next 12 months, but slower EPS growth over the next 3 years.
   
• Analysts expect members of the MSCI Emerging Markets Energy Index to grow their EPS at a higher rate than members of the S&P 500 Index on both a 12-month and 3-year per annum basis, however, emerging markets energy stocks are less profitable in their bottom line than their S&P 500 Index counterparts. The MSCI Emerging Markets Energy Index maintains an aggregate profit margin of 7.48% while the S&P 500 Index maintains an aggregate profit margin of 7.83%.