One Pain Point in Emerging-Market Stocks Refuses to Go Away

(Bloomberg) -- Even as earnings estimates rebound across emerging markets, one sector is doggedly going from bad to worse: information technology.

The first five months of 2019 saw the average profit projection for developing-nation companies tumble about 7%, with the biggest drag being IT firms, whose estimates sank 29%. And when the tide turned and forecasts for emerging markets as a whole rose 1.7% in the past seven weeks, technology companies failed to catch up -- their estimates have fallen a further 2.3%.

Analysts are skeptical of the outlook for the information technology subgroup even as they grow bullish on commodities and energy stocks, which are sensitive to the ongoing trade conflicts between the U.S. and China. Emerging-market IT firms have seen their average earnings fall in the second quarter by the most since 2015, which put a rude end to the exuberance of past years, when IT firms drove the equity rally and became the biggest subgroup in the MSCI Emerging Markets Index.

Now the relative weight of the IT industry in the gauge has halved to under 14% compared with January 2018, both as a result of its underperformance and a rebalancing of the index by MSCI Inc. which saw several high-profile companies move to other indexes. The result is that the importance of IT companies to emerging-market equity performance has waned.

That doesn’t mean the technology sector has nothing to recommend it. Despite weaker earnings in the second quarter, the average profit at emerging-market IT firms is above estimates made 12 months ago for this time. With the steep cuts the segment is witnessing this year, some investors may bet analysts are far too pessimistic.

The MSCI EM Information Technology Index has rallied 12% this year, compared with a 9.3% gain for the broader emerging-market gauge. This superior momentum may impress analysts only if the third-quarter earnings show an advance to make good for the 12% earnings plunge in the April-June period.

To contact the reporter on this story: Srinivasan Sivabalan in London at ssivabalan@bloomberg.net

To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Alex Nicholson

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