Dot-com ghosts haunt emerging stocks as tech profits stall

The deepest bear market since the financial crisis in developing-nation technology stocks probably has further to run as earnings disappoint and analysts slash their profit estimates.

Companies in the MSCI emerging-market tech gauge are missing earnings forecasts for the first time in almost 18 months, based on 12-month rolling data. Combined with deepening trade tensions, that’s leading analysts to cut their profit forecasts for an industry dominated by Taiwanese semiconductor makers and Chinese Internet firms.

Emerging-market tech stocks have slumped 29% since January 26, leading a 24% decline in the broader MSCI EM Index. The sell-off looks remarkably similar to the dot-com bubble in the late 1990s and subsequent bust in 2000. The equity gauge was then dominated by Asian technology companies, like it is now, and witnessed widespread losses when their exuberance faded as the Federal Reserve began tightening under then Chair Alan Greenspan.

“The pain will continue until the Fed stops its quantitative tightening,” said Julian Brigden, a hedge-fund consultant at Macro Intelligence 2 Partners, who made a prescient bet against developing-nation stocks within two days of their 2015 high. “What we really need is a capitulation trade — where you push down equities to the point where the Fed stops hiking. That doesn’t look likely.”

Chinese semiconductors and Alibaba Group are among the most vulnerable amid the global tech sell-off, according to Patricia Perez-Coutts, a Toronto-based fund manager at Westwood Management. Meanwhile, shares from Internet giant Tencent to NetEase and Taiwan Semiconductor Manufacturing have been unfairly punished and look attractive at current valuations, she said.

“They’re already cheap, but it doesn’t feel like markets will reward them just yet,” Perez-Coutts said. “If there’s vulnerability, it’s associated with the whims of the market, which in many cases should be ignored because they’re not discerning between one company and another. They’re stampeding out.”

The resemblance between now and the dot-com era suggests that the technology-led slump can continue for almost another year. While that takes us into the realm of speculation, it’s easy to see that there’s little upside to this group of equities, based on valuation and earnings.

At 12.2 times projected earnings, the technology subgroup trades at a 17% premium to broader emerging markets as of Tuesday. At the same time, profit estimates for the MSCI EM Information Technology Index over the next year have been cut to below the gauge’s trailing 12-month earnings.

That’s hardly an argument for a rebound.

� L.P