Strongest earnings optimism in 21 months buoys emerging stocks

Emerging-market stocks rose for the first time in three days as optimism grew over the corporate-earnings outlook and as the US dollar halted a rally.

The MSCI gauge for developing-world stocks traded 0.2% higher as of 9:40 a.m. London time, with semiconductor companies contributing most to the gains. The average 12-month forecast for profits at EM companies rose to the highest level since September 2022, data compiled by Bloomberg show.

Analysts are stepping up their view of EM corporate performance as an era of high interest rates gives way to expectations for easing in line with Federal Reserve, which may begin cutting interest rates by December. The dollar has traded in tight ranges for the past three days amid signals the US labor market is nearing an inflection point, boosting the case for rate reductions.

“The rise in EM earnings is supportive for the market and should continue in an environment of positive macro fundamentals,” said Rajeev De Mello, chief investment officer at Gama Asset Management. “The critical next step will be the pricing of a more robust easing cycle, led by the Fed and followed by EM central banks.”

Taiwan Semiconductor Manufacturing Co. and Hon Hai Precision rallied on improving confidence over the earnings potential of chipmakers.

TSMC is poised to beat the top of its $20.4 billion sales guidance for the second quarter, driven by robust demand for AI products, according to Bloomberg Intelligence. This momentum also suggests potential upward revision of its 2024 revenue growth target to above 25% from “low to mid-20%.” Meanwhile, Hon Hai’s expansion in semiconductors, optical and server components should be margin-accretive, according to another BI report.

In the currency market, volumes were thin and moves were small, with the South African rand and Turkish lira underperforming. The rise in currency volatility is underpinning trader sentiment, especially from a carry-trade perspective. Political risks have come to the fore, with investors watching Cabinet formation in South Africa and the progress of orthodox monetary policy in Turkey.

Indonesia, South Korea and the United Arab Emirate are marketing dollar-denominated notes on Tuesday. The Indonesian government is looking to sell five-, 10- and 30-year Sukuk, with the 30-year tranche being a green deal. South Korea is returning to the US-currency market for the first time since 2021. The UAE is also selling its first eurobonds since September, offering investors 10-year dollar debt.