Even as the coronavirus pandemic continues to spread, investors and analysts are betting that reopening economies will spark a surge in consumers’ discretionary spending.

The equity rally in the developing world is a case in point.

The biggest quarterly gains since 2009 for the benchmark MSCI Emerging Markets Index are being driven by the consumer-discretionary subgroup, which is itself witnessing the best quarter in a decade thanks to advances in carmakers, cafe chains and luxury retailers. While Asia is at the center of this rebound, companies from Poland to Chile are also joining the rally.

The growing dominance of consumer-focused companies in the equity gauge reflects the changing structure of emerging economies, which are moving away from their dependence on commodity prices and nurturing their domestic markets. It also suggests the bounce-back in emerging-market shares from the March rout can be sustained even if raw-material prices drop or trade-war worries return.

Record Valuation
The MSCI EM Consumer Discretionary Index has jumped 24% since the end of March, taking its valuation to a record high. Investors are now paying $25.40 for each dollar of projected profit to own the stocks. That’s almost double the average price-estimated-earnings ratio of 13.2 over the past 26 years.

Analysts are taking the cue. They are raising earnings estimates for the group, reducing concerns the stocks may have become too expensive.

Momentum Leader
The consumer-discretionary subgroup is outperforming the broad-market benchmark and also has a greater momentum. It’s the only industry group to improve its position on the relative rotation graph of the MSCI emerging markets gauge. In other words, it’s not only rallying faster but also widening its lead over the rest of the market.

Bigger Share
That superior advance, and the fact that MSCI Inc. now includes online giant Alibaba Group Holding Ltd. in the consumer-discretionary industry, have made the group the second-biggest by weight in the benchmark index. Its higher share has come at the cost of finance, energy, industrial, real estate and utility companies.

The continued outperformance of the consumer-discretionary group in emerging markets depends on the rapid return of China’s economy to pre-Covid levels. While the MSCI gauge has reduced its dependence on oil and commodities in recent years, it has grown more reliant on China’s fortunes.

A surge in second-wave infections in China or a significant threat to its consumer economy are the key risks for the industry group in the second half of 2020.

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