South Korea’s Exports Are Flashing A Warning Sign For Stocks

South Korea’s Exports Are Flashing A Warning Sign For Stocks
Luke Suddards

over 1 year ago2 mins

Mentioned in story

If you want to get a sense of where corporate earnings around the world are headed, South Korea’s exports might give you an idea. The country’s companies are deeply embedded in the global supply chain, and their collective exports can serve as a leading indicator for international economic activity and global stock earnings per share (EPS). This chart shows us the long-standing relationship between South Korea’s export growth and the earnings per share (EPS) growth for the MSCI World Index.

The current consensus for 2023 MSCI World EPS is at 3.6%, which seems a tad bit too optimistic based on this chart. With South Korea’s exports dipping into negative territory, it’s likely that EPS growth with follow – and potentially overshoot this, as it’s often done in the past. What’s more, Citi analysts believe the next global EPS recession is about to begin. And a global EPS recession similar to the past seven (-31% average) would imply a further 30%-40% off the MSCI World EPS. They’re concerned that equity investors are too fixated on interest rates and the negative earnings impact could be a blindspot.

Let’s run through why companies’ EPS could come under pressure. Slowing global demand and disinflation mean companies will lose their pricing power and as a result revenue growth will take a hit. A still-tight labor market (almost two jobs for every unemployed person in the US) will mean sticky fixed costs that pressure profits. And although the US Federal Reserve looks set to cool the pace of its hikes, it also looks set to keep them higher for longer. That means there will be no support from lower rates driving valuation multiples higher to offset the expected lower earnings.

So if consensus EPS expectations are too high and that adjusts downward significantly, which seems to be the likely outcome, then indexes like the MSCI World will fall. In a market environment like this one, with yo-yo style price action, a dollar-cost averaging strategy, which allows you to buy in at different times and price levels, can be useful.

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