EM Market To See Stronger Earnings Growth But Leverage Weakening

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The earnings growth of Asia-Pacific emerging market (EM) companies is set to outperform that of developed market (DM) companies. But ongoing political tensions and uncertain economic conditions will present risks to recovery, according to a new report by Moody’s Investors Service.

“On aggregate, the EBITDA of Moody’s-rated EM companies in APAC will grow 28% this year from 2019, while rated DM companies’ earnings will grow 14% in the same period,” says Rachel Chua, a Moody’s Vice President and Senior Analyst.

“But EM companies have taken on more debt relative to earnings growth, resulting in weaker debt to EBITDA. Their average leverage will rise to 5.1x in 2022 from 4.3x in 2019, compared with DM companies’ largely stable leverage of around 4.5x,” adds Chua.

Companies in China (A1 stable), Indonesia (Baa2 stable), India (Baa3 stable), Malaysia (A3 stable) and Thailand (Baa1 stable) will see earnings growth of varying degrees, with those in Indonesia reporting the highest earnings growth of 56%, followed by 51% in India and 36% in Thailand. This will be driven by commodity producers benefiting from high spot prices.

Industrial Earnings Growth

Sector-wise, earnings and leverage will improve for most industries, with the earnings of metals, mining and steel as well as oil and gas companies growing the most on elevated prices.

Consumer-focused industries such as autos and retail will benefit from pent-up demand as social restrictions ease. But the earnings of gaming companies in Macao SAR, China (Aa3 stable), will decline on continued travel restrictions in China, and Chinese property developers’ EBITDA will fall on the back of weakened homebuyer confidence.

Geopolitical uncertainties related to the Russia-Ukraine military conflict and the still-factious US-China relationship, and the soft macroeconomic environment will pose downside risks to these projections. Any further weakening in global economic conditions will hurt Moody’s earnings projections for 2022.

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