EM is not dead, and the growth that US and global companies can find from this consuming class is not just hype, but the impact of currency devastation is now reverberating through earnings announcements of some of the most successful US and global players operating in EM. Growth may also fall by the wayside if these economies need to raise rates to shore up their currencies.
Companies like Procter and Gamble (PG, quote) Caterpillar (CAT, quote) and Whirlpool (WHR, quote) - all of these in the Emerging Money Global EM Index (EMGEI) - have been relying converted profits in Brazil, Venezuela, Argentina, India, Turkey and Mexico to help their bottom line, but now EM currency devastation is causing many to question the next round of EPS reporting.
The issue facing the local subsidiaries of these mammoth global companies is that they may also have a cost base in Dollar (debt) and yet are selling their products locally in the home currency. Either way, local profits translated back to US Dollars are falling short.
How do we know? We are in the late innings of the 4Q reporting season and we have heard many players talk of "FX impact" on their numbers. But what has led to bigger moves in the stock prices of these companies than the currency impacted earnings warranted is that we expect 1Q 2014 to be even worse. YTD currency moves across EM are trending significantly worse than 4Q 3013. Forget the extreme outliers like Argentina and Venezuela, so far Russia, South Africa, Chile, Columbia, Hungary, Turkey (RUB, TRY, BRL, MXN) are all down 4-7% through today. Even the Mexico Peso has been under pressure. And if you ask EM specialists all around, the view is that EM currency weakness will continue over the next 3-6months.
The currency warnings from multinationals will continue, and this will crimp the strong earnings we have seen from multinationals in the last four quarters. Investors need to stay nimble and on their toes to be defensive in 1Q but also should be building their shopping list for opportunities to buy great companies on pullbacks, when the macro also has clarified. Warnings from multinationals will create opportunities.
Here is an example: I stated on Fast Money last night that Whirlpool has fallen from $159 to $126 in short order despite recently announcing 4Q numbers for last year that beat on top and bottom lines and then reaffirming 2014 EPS, even with the backdrop of LatAm currency weakness. The stock, at $110-115, has strong historical technical support and looks like one to watch. At these levels the company is trading 10.5x 2014 profits which is solid discount to its recent 12m history and its longer term trend.