Emerging market firms out of favour

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br chinapet Bloomberg Petrochina is the only remaining company from a developing nation among the world's 20 largest companies. Photo: Bloomberg

New York and Singapore - Emerging market firms are disappearing from the ranks of the world’s biggest stocks.

For the first time since 2005, only one developing nation company, PetroChina, is among the top 20 by market value as equity investors pull money out of the countries. The oil producer fell to 14th from fourth a year ago, while Industrial & Commercial Bank of China sank to 22nd on Monday after losing $38 billion (R414bn) of value. Samsung Electronics, South Korea’s largest company, dropped 11 spots to 27th.

Less than two months into the year, investors have withdrawn more than $10bn from emerging market exchange-traded funds, exceeding last year’s $8.8bn of outflows.

Developing nations’ growth advantage over advanced economies has narrowed to the smallest in 11 years. Money is flowing into US and European firms, which tapped recoveries in their own economies to produce higher returns on equity than emerging market peers.

“There is more downside” for emerging markets, said Joseph Quinlan, the chief market strategist at Bank of America’s US Trust. “Can they face up to world-class competitors from the US, Japan and Europe? I’m not convinced that at the micro level, the emerging markets are up to the task.”

Last year’s outflows from exchange-traded funds in developing nations were the first recorded, following a decade in which they attracted more than $110bn. The MSCI emerging markets index fell 0.1 percent by 10.23am in London yesterday, while the MSCI world index gained 0.1 percent.

The investor scepticism 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’s market value topped $1 trillion in November 2007, but has since lost almost 80 percent of its capitalisation.

Emerging economies probably grew by 4.5 percent last year, versus 1.2 percent for advanced countries, the smallest gap since 2002, according to the International Monetary Fund (IMF).

“People looked at the quantity and didn’t look at the quality,” Bank Julius Baer head of Asia research Mark Matthews said. “Starting around 2009, people focused more on the quality of the economic and earnings growth in places like China and India, and they realised it wasn’t as strong as they thought.”

The underperformance of emerging markets has become more pronounced this year as reduced US 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 has lost 9.4 percent.

In contrast, the Standard & Poor’s 500 index briefly hit a record on Monday and US companies now account for all five of the biggest companies by market value. – Bloomberg


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