Daily Agenda: Emerging-Markets Stocks Continue Winning Streak

Deere posts strong earnings; U.S. oil producers to bid for Mexican drilling rights; Department of Justice rules to wind down private prisons.


Angel Navarrete

As investors have attempted to gauge the likelihood of a Federal Reserve rate hike before year-end and commodity prices have fluctuated, one segment of financial markets has rebounded quietly: emerging markets equities. After years of abysmal performance, the group has found its feet in 2016 with the MSCI emerging-markets benchmark up by more than 14.5 percent year-to-date. The shift among allocators comes as growth in developed economies such as Japan and Europe is anemic at best and the U.K.’s vote to leave the European Union poses an additional macro headwind for trade. Despite concerns over the sustainability of Chinese debt levels, the affect of declining commodity demand on Brazil and geopolitical insecurity, investors appear to be concluding that the emerging economies’ growth potential is attractive compared to prospects elsewhere. Additionally, valuations for U.S. large-caps may appear lofty compared to emerging-markets stocks that have been out of favor for years. As investors returning from summer vacation consider their exposures, one major question is whether the seemingly cheap growth potential provided by emerging-market equities sufficiently rewards those willing to ride out the volatility historically associated with the asset class.

Deere profits rise. Deere & Co.’s financial results for the third quarter issued today came in higher than consensus analysts’ estimates at $1.55 per share versus $1.53 during the same period last year. The largest agricultural equipment manufacturer globally raised guidance for full-year income to $1.35 billion. Despite declining farm profits, Deere has successfully cut costs through an aggressive program of layoffs and reducing manufacturing capacity.

U.S. oil consortium bids on Mexican drilling rights. Bloomberg News, citing anonymous sources, today reported that U.S. energy companies ExxonMobil Corp., Chevron Corp. and Hess Corp. have joined forces to make a joint bid on rights to drill in deepwater areas being put up for auction later this year by the Mexican government. Mexico adopted legislation two years ago that will allow foreign producers to operate within its territorial borders for the first time since before World War II. In all, Mexico hopes to bring in more than $40 billion selling rights to exploit oil resources in the Gulf of Mexico.

Federal government to phase out private prisons. Yesterday the Federal Bureau of Prisons, a division of the Department of Justice, announced it will begin the process of ending relationships with private-sector prison operators. The statement issued by the bureau concluded that private contractors do not provide substantial savings while failing to provide the same level of correctional services of federally operated facilities. Critically, the decision will not affect private contractors operating facilities on behalf of immigration and customs enforcement. Stocks in the sector sold off sharply, with industry leaders Corrections Corp. and GEO Group declining by 35 percent and 40 percent, respectively.

Gap beats on earnings but lowers guidance. San Francisco-based clothing retailer Gap reported second-quarter financial results yesterday that included earnings of $0.60 per share, slightly above consensus analyst estimates. Management dialed back investor expectations, however, with guidance that trailed consensus forecasts. The multibrand retailer has been attempting to stage a turnaround after the impact of a strong U.S. dollar and shifting consumer tastes challenged the company’s dominance in casualwear markets.