CAIRO: Citigroup’s recently published CEEMA Strategy Notebook warns of further deterioration in emerging markets for 2009.
The report covers equity strategy in Central and Eastern Europe, the Middle East and Africa based on quarterly reports from companies across the region.
Global valuations, earnings, economic forecasts, as well as detailed information on each country’s economic health is provided in the report, which is intended to supply investors with current information by which to measure investment opportunities.
The notebook cautions of the potential for more market shocks in 2009, citing the deteriorating earnings numbers for the fourth quarter of 2008 being published by CEEMA firms.
“About a fifth of CEEMA firms have reported fourth quarter results, and more than half have missed expectations. Among those that have reported, full year 2008 earnings are down 20 percent compared with 2007, the reports said.
Based on these numbers, the authors believe that analysts’ forecasts of a 12.6 percent decline in earnings in 2009 as compared to 2008 is too optimistic; they predict a drop of at least 25 percent in earnings across the region covered by the report.
Placing current events in the context of historical growth, the authors note that emerging markets’ growth earnings have been generally robust and taken place in surges, often followed by downturns.
The report observes that, historically speaking, it would not be out of the ordinary for a strong period of earnings growth to be followed by a particularly severe downturn as is happening currently.
This historical precedent does not bode well for a quick market recovery; the past 10 years of robust growth could mean a lengthy recession lasting well into 2010.
On a more positive note, there is one thing that can be done to speed up the transition from recession to recovery: bring things down to size.
Re-sizing growth expectations will help markets take a realistic approach to rebounding. In the opinion of the authors, keeping earnings predictions artificially high will hinder market recovery.
“We would like to see forecasts turn more broadly cautious to indicate that the adjustment in expectations is fully entrenched, they said in the report.
Naturally, circumstances vary from country to country and industry to industry. The report cites the Czech Republic and Turkey as resilient markets, while noting that Russia and other Eastern European countries like Poland and Hungary have been hit particularly hard.
Industry-wise, the notebook recommends investment in sectors that are likely to show earnings resilience, among them healthcare, consumer staples and telecoms.
Local analysts are a bit more optimistic about Egypt’s prospects for 2009.
“We believe that Egypt enters 2009 in better shape than many of its peers for three reasons. First, the economy is underleveraged; second, Egypt has built up significant foreign assets since 2003; and third, government policy is far more flexible than it was during Egypt’s previous downturn, said the EFG-Hermes Egypt Research Yearbook.
Analysts at EFG-Hermes predict just a 7 percent fall in 2009 earnings, but caution conservatism in investment strategies as markets recover, concluding that while volatility is falling, earnings are in question for 2009.
Like the authors of the CEEMA report, EFG-Hermes analysts recommend stocks with good earnings potential, especially telecoms and large banks. Contrary to the recommendation of consumer staples stocks made in the notebook however, EFG-Hermes analysts said that, in Egypt, consumer goods and other cyclical stocks will suffer due to a reduction in income from tourism, remittances and a general slowdown in business.
While analysts at EFG-Hermes do not believe that Egypt is headed for a major financial disaster, things have definitely slowed down, particularly in terms of external demand.
The ability to recover strong earnings will be based less on the performance of Egypt’s markets and more on external factors impacting the country’s earnings potential. In other words, when the rest of the world starts to recover, Egypt will benefit.
As more CEEMA firms disclose their earnings for the fourth quarter of 2008, it will be easier to assess the prospects for CEEMA in 2009. Until then, the most important message in the CEEMA Strategy Notebook is this: investors, corporations and analysts mush take a realistic assessment of the current financial situation, adjust their expectations, and work towards recovery from there.
