What’s Really Driving The Emerging Markets Boom?

Ted

FYI: Emerging-market equities have been one of the investment darlings of 2017, handily outpacing their developed-market peers on a narrative of accelerating global growth. The idea that a booming world economy is consistent with EM outperformance seems so obvious that it isn’t even worth checking—but is that actually the case? I'm a macro strategist who writes Bloomberg's Macro Man column and I decided to take a look at what really drives the relative returns of emerging markets. To do that, I took a Mythbusters-style approach to find the answer.
Regards,
Ted
https://www.bloomberg.com/news/articles/2017-11-28/what-s-really-driving-the-emerging-markets-boom

LewisBraham

The notion that what's good for the stock market is good for the economy and vice versa is a lie that continues to be told for political reasons. Many economic statistics are unrelated to the stock market at best and negatively correlated to it at worst. Low unemployment and wage inflation for instance mean more people have jobs and are getting paid better wages. Most shareholders don't like when people get raises and have the negotiating power to ask for higher wages because of low unemployment as it means less profits for shareholders. Markets of low or slow growth economies can and often have outperformed high growth ones. The question for investors isn't how fast the economy is growing, but how much of an economy's revenues corporations can extract in the form of profits to distribute to shareholders.

bee

@LewisBraham said,

The question for investors isn't how fast the economy is growing, but how much of an economy's revenues corporations can extract in the form of profits to distribute to shareholders.

Your thoughts on this upcoming event (repatriation of corporate profits from overseas) with regard to "profits to shareholders"?

My Take:
As the Corporate Tax (repatriation of corporate profits from overseas) holiday unfolds US companies have many options as to where these profits go.

1. Hire additional US workers- Grow & re-base some production here in the U.S. - maybe, but additional reasons need to also be in play like lower energy costs, SALT breaks, etc..this takes time. I'm hopeful, but skeptical.

2. Buy Back Company Stock - This has been the game plan for many companies with some of their profits. Buy back of stock makes remaining stocks more valuable and usually paves the way to higher share prices and/or lower PE. I see a "piling in" dynamic if this unfolds quickly with overseas profits and maybe even a capitulation of markets if it happens over many companies or sectors of the market.

3. M&A - Money repatriated could be used to buy/merge the competition. This often is a boon for small company stock that are bought, but often is a wash for the stock prices of two large companies becoming one Mega-company. My unscientific observation is that, often times, the purchasing company's stock will initially fall during the M&A event.

4. Global M&A - Repatriating profits doe not preclude a U.S. company that is global from deploying these profits overseas to hire more workers in non US locations or buy/merge (M&A) with companies outside of the US markets. Foreign & Emerging Markets (getting back to this thread) could be another place where these repatriated dollars go especially if that is where these global companies future growth is most profitable.