Goldman says emerging equities ripe for more earnings downgrades

Goldman Sachs Group Inc. expects emerging market equities to see more earnings downgrades even as the region’s valuations have dropped and it leads the US in terms of cuts to profit estimates.

“While significant further EPS cuts appear to be discounted in EM equity valuations, there are likely further reductions in the pipeline until the broader macro backdrop turns,” strategists including Kamakshya Trivedi wrote in a note dated Oct. 19. There can be “higher risk for more US-exposed parts” of the region, they wrote.

Trivedi and team’s view on emerging markets differs with that of Morgan Stanley strategists including Jonathan Garner, who on October 4 called time on the asset class’s bear-market cycle. Garner’s upgrade of EMs to overweight from equal-weight followed the longest ever peak-to-trough run for the MSCI Emerging Markets Index amid a surging dollar and China’s stringent Covid restrictions.

Morgan Stanley Says Bottom Near for Emerging-Market Equities

The slump in the MSCI EM benchmark’s earnings-based valuation sits roughly half-way between what it suffered during the Global Financial Crisis and 2018 bear market, according to Goldman’s calculations.

The strategists added that investors should prefer defensive markets until the macro backdrop improves. They are overweight on Latin America, South and Southeast Asia, and Middle East and North Africa.

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