The Biggest Myth About Emerging Markets
File this one under “Much ado about nothing!”
As I pointed out on Friday, stocks in the most popular emerging markets are getting clobbered. Truthfully, the entire emerging markets space is taking it on the chin right now. Not just Brazil – but Russia, India and China, too.
Case in point: The MSCI Emerging Markets Index is down 10.7% this year, compared to a 13.2% rise for the S&P 500 Index.
The disconnect isn’t accidental, either. As Ruchir Sharma, Head of Emerging Markets at Morgan Stanley (MS), shared in our recent interview, the fundamentals in the United States actually outclass much of the world. (Shocker, right?)
Nevertheless, I’m already starting to hear chatter that the unfolding crisis in emerging markets is going to undercut the bull market here in the United States.
Some even liken the impact of emerging markets on the rest of the world to a worm spreading through bad apples.
Hogwash! And in honor of Myth-Busting Mondays, I’m going to prove it.
Remember the Alamo Euro Crisis!
You’ll recall, in late 2011 and much of 2012, investors worried that the crisis in Europe would sabotage the rally in the United States.
Such a belief wasn’t without merit, either.
As I shared at the time, U.S. companies rely heavily on international sales.
According to Standard & Poor’s Howard Silverblatt, foreign sales recently accounted for 46% of total revenue for S&P 500 companies. Of that, 29% came from Europe. That works out to about $0.14 out of every dollar in sales coming from Europe.
That’s significant enough that any slowdown in Europe promises to create a ripple effect in the United States. Indeed, this time last year, headlines like this one from Reuters cropped up everywhere: “U.S. Companies Blame Europe for Earnings Warnings.”
Did the euro crisis spell disaster for the bull market in U.S. stocks, though? Not at all.
But why bring any of this up? Because it’s necessary to put the impact of a slowdown in emerging markets on U.S. companies into perspective.
Whereas Europe accounts for about 14% of sales for S&P 500 companies, emerging markets only account for about 5%, according to Goldman Sachs’ (GS) David Kostin.
And emerging markets account for just 6% of total profits for U.S. economies. That figure is trending lower, too. Take a look:
The end result? “Weaker [emerging markets] growth poses little risk to S&P 500 earnings,” says Kostin.
Or, more plainly, don’t freak out!
Stick With “Made (and Sold) in the U.S.A”
If you’re still reluctant to believe that the United States can escape the slowdown in emerging markets (with profits intact), there is a solution.
Start looking for companies that derive the overwhelming majority (or all) of their sales from the United States.
Believe it or not, blue chips like McDonald’s (MCD) generate more than 50% of their sales from overseas.
However, an analysis by Bespoke Investment Group reveals that companies with mostly domestic sales exposure are outperforming companies with more than 50% of sales coming from overseas – by an average of five full percentage points this year (16% versus 11%).
Bottom line: The natural tendency is to assume that U.S. companies rely much more heavily on foreign sales than they really do. Now you know the truth. And there’s absolutely no reason to freak out about emerging markets sabotaging the bull market in the United States.
Ahead of the tape,