Global Investing

It’s not shaping up to be a good year for emerging equities. They are almost 3 percent in the red while their developed world counterparts have gained more than 7 percent and Wall Street is at record highs. When we explored this topic last month, what stood out was the deepening profit squeeze and  steep falls in return-on-equity (ROE).  The latest earnings season provides fresh proof of this trend and is handily summarized in a Morgan Stanley note which crunches the earnings numbers for the last 2012 quarter.

The analysts found that:

–With 84 percent of emerging market companies having already reported last quarter earnings, consensus estimates have been missed by around 6 percent. A third of companies that have already reported results have beaten estimates while almost half have missed.

– Singapore, Turkey and Hong Kong top the list of countries where earnings beat expectations while earnings in Hungary, Korea and Egypt have mostly underwhelmed. Consumer durables companies recorded the biggest number and magnitude of misses at 82 percent.

– Asian firms missed earnings forecasts by 4 percent, Latin America by 6 percent and EMEA-based firms by 3 percent, Morgan Stanley estimate. (Note: MS include Australia in the Asian list but not Japan)

– Outside of EM, the picture is mixed: while U.S. S&P 500 companies have reported an aggregate earnings beat of 5 percent, companies from MSCI Europe have missed consensus by 4.2 percent.

Wall Street has been doing pretty well in recent years. Just how well is illustrated by the steady rise in corporate profits as a share of the national economy. Look at the following graphic:

Of it, HSBC writes:

The profits share of GDP in the United States must rank as one of the most chilling charts in finance.

 
What this means is that around 12 percent of American gross domestic product is going to companies in the form of after-tax profits. A year ago that figure was just over 10 percent and in 2005 it was just 6 percent. In contrast, the share of wages and salaries in the U.S. GDP fell under 50 percent i n 2010 and continues to decline. Comparable figures for the UK or Europe are harder to come by but analysts reckon the profits’ share is within historical ranges.

UK private bank Coutts (established in 1622, the year of the Glencore Massacre and two years before the Bank of England was founded) has been very bearish.

It still attaches a high, 25 percent chance to a partial or complete euro zone breakup and has been recommending its investors to position very defensively.

The chart below shows their base-case assumptions of S&P 500 index at 1,300 (about 3% below the current level), along with best and worst case scenarios.

How bad will hedge funds’ year-end performance figures look?

According to Credit Suisse/Tremont, funds fell 6.30 percent in October after a 6.55 percent drop in September, taking losses for the first ten months to 15.54 percent.

Seven strategies are now nursing double-digit losses, with only two — managed futures and dedicated short bias — in positive territory.

Even global macro, which bets on the likes of global equity markets, world currencies, sovereign debt and commodities, is now back in the red. These funds are down 7.10 percent after substantial losses in September and October.

So star hedge fund manager Greg Coffey has opted to join established firm Moore Capital.

In April, when high-performing, high-earning Coffey resigned from GLG, the market was awash with rumours that he wanted to start up his own firm, pulling in billions from investors.

However, times have changed in the hedge fund industry.

The average fund is down nearly 20 percent so far this year, according to Hedge Fund Research’s HFRX index, while emerging markets funds have taken a particular battering as markets such as Russia and China have fallen.

Things are going from bad to worse for hedge funds.

Having only just clawed back their losses after a dreadful March, the closely-watched Credit Suisse/Tremont Hedge Fund Index shows hedge funds lost a hefty 2.61 percent in July after being hit by a double-whammy of market movements.

These freewheeling funds had been betting for some time that banks stocks would fall as the credit crisis ate into their profits, while also betting that commodities would rise as demand for oil, metals and food soared.

This had been working well, but in July banks bounced back because they looked so cheap to some investors, while commodities fell from some of the dizzying heights they had recently reached.