Comparing emerging markets with the developed markets of Europe and the US, Francesco Curto, head of Deutsche Bank’s valuation group CROCI (cash return on capital invested) says it is emerging markets that are the risk.
CROCI has estimated that 54% of emerging market industrial companies will see a decline in real earnings this year.
“Emerging market companies are investing too much, diluting cash returns and resulting in poor real earnings growth,” Curto explains. “The cure for this malaise is a slowdown in the corporate growth rate. Given the tightening credit conditions, this is a likely outcome, in our view. But a fall in corporate capital accumulation would ultimately translate into an emerging market economic slowdown.”
While he is still negative on emerging market equities he suggests that the situation could “warrant a more aggressive stance up to year end”.
Instead he prefers the solid cash generation of the US adding that, using an EV/FCF (enterprise value to free cash flow) ratio, the US and not emerging markets is the cheapest region, with Europe at fair value.