Patrik Schowitz

Macroscope | With tech sector and US stocks losing their shine, emerging markets are the ones to watch

While more modest corporate earnings and the quick pace of policy tightening have hurt the tech sector and US equity market, emerging market equities have been much more resilient

China’s looser monetary policy should lift its economy, with the positive effects spilling over to other closely linked economies

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A public screen displays the Shenzhen Stock Exchange and the Hang Seng Index figures in Shanghai on February 7. There are early signs that earnings among emerging market companies are beginning to stabilise after a prolonged period of weakness – just as the earnings picture in developed markets is beginning to look less stellar. Photo: Bloomberg

Patrik Schowitz

Published: 1:30am, 12 Feb 2022Updated: 2:19am, 12 Feb 2022

After another stellar year in 2021, global equity markets have had a difficult start to the new year, falling by 8 per cent as of late January, although they have recovered somewhat since. To make matters worse for many investors, two long-running market leaders, namely the US equity market and the global technology sector, have been under particular pressure.

A key driver of the change in market fortunes has been the rapid shift in mood by major central banks across the globe, from a very loose monetary policy stance towards a fairly rapid tightening. This shift was brought on by inflation pressures that have been much more stubborn and persistent than central banks had expected, particularly in the US.

However, another factor has recently become important in driving equity market nervousness: the outlook for corporate profits. Over the past 18 months, growth in corporate earnings has been so explosive that it has outweighed many investor concerns, such as Covid-19 disruptions or high equity valuations.

We are currently in the middle of the global earnings season, when companies report their quarterly results. Since early 2020, companies globally have repeatedly and resoundingly beaten analysts’ expectations, providing much of the fuel propelling markets higher.

Stock market information is seen at the Nasdaq MarketSite in New York on February 3. High-flying technology and internet companies have long been a pillar of market strength. Photo: Bloomberg

In this earnings season, it was hoped that much better-than-expected results for the last quarter of 2021 would again help soothe market nerves. While earnings growth is still solid by historical standards and results are still beating expectations, they are doing so by much smaller amounts than investors have become accustomed to.