Strategy Note /

China stocks' harsh loss as Xi wins: Emerging-Frontier Equity Monthly – October

  • In October, China down 16% and its largest Tech apps down 24%: Xi's coronation greeted with distrust by investors

  • Slightly weaker US dollar helps euro-related EM and LatAm. US semiconductor controls hit Taiwan more than Korea

  • Attractive value, eg manufacturing (Mexico, Vietnam), tourism (Thai, Georgia), commodities (Brazil, Chile), tech (China)

China stocks' harsh loss as Xi wins: Emerging-Frontier Equity Monthly – October
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
31 October 2022
Published byTellimer Research

At the close of 28 October, MSCI DM was up 8% month-to-date, whereas EM was down 3% and FM was down 4%.

Around the equities world this month


  • US dollar (trade-weighted) was down 0.5%, although the real effective exchange rate remains near a multi-decade peak, and the US 10-year yield was up 28bps, above 4.0%, still near the 4.2% last decade peak seen in the third week of the month. For more detailed discussions of the implications for EM, please click on these report links: US dollar and US yield.

  • Oil price (Brent) was up 7%: the OPEC+ quota cut at the start of the month outweighed continuing concerns over global growth concerns.

  • Food-related commodity prices were mixed, with Wheat, Pork, Rice and Soybean down 2-8% but Palm Oil up 25%. Of concern for wheat importers, eg Egypt, is the abrupt and indefinite withdrawal by Russia, on 29 October, from the deal to allow safe transit of grain exports from Ukraine, claiming a drone strike was launched from one of the grain vessels.


  • China (down 16%, with the FX rate down 1.6%, and the largest Tech stocks down 24%): the latest five-yearly China Communist Party Congress saw the renewal of General Secretary Xi Jinping's term, the staffing of the politburo with his loyalists and a speech that did nothing to assuage long-running concerns around state versus private sector capitalism and regulatory crackdowns ('common prosperity'), property debt woes, inward focus ('dual circulation'), zero-Covid lockdowns and geopolitical tensions over Taiwan. There was also a moment of apparently unscripted disorderliness with the exit from the podium of former President Hu Jintao. A wholesale abandonment of economic pragmatism in favour of ideology looks overblown (and likely reflected in deeply discounted valuation multiples relative to the historical average).

  • Vietnam (down 13%, with FX rate down 4%) caught a cold from China's sneeze, specifically the lack of visibility of a change in its zero-Covid policy. Vietnam is a long-term beneficiary of the addition of new global manufacturing capacity outside China but, in the short and medium terms, its supply chain is closely interwoven with that of China – imports from China (which are typically processed into more finished export products) equate to around one-third of Vietnam GDP.

    Separately, the anti-corruption campaign of Vietnam Communist Party General Secretary, 78-year-old Nguyen Phu Trong, who, like Xi, is in his third term, continues, with its associated occasional, unforeseen public eruptions. This month, the chairwoman of privately held real estate developer, Van Thinh Phat, was detained and this triggered concern over related-party exposure in Saigon Commercial Bank, which is privately held and the fifth largest by deposits.

  • The Philippines (up 9%, with FX rate up 1%) recovered from its sharp fall in the prior month, driven by the easing of Covd restrictions (indoor masks, unvaccinated tourists) – September international visitors were up 16x yoy but were merely 40% of the equivalent month in 2019.

Middle East

  • Saudi Arabia (up 4%) benefited from the 8% bounce in oil price and continuing bullish data on the non-oil economy – for September, PMI of 56.6 and point-of-sale transactions growing 18.6% yoy. However, press reports, during the last week of the month, that the main sovereign wealth fund, PIF, intends to sell down its stakes in domestic, publicly listed firms – with neither a timeframe nor a list of which companies mentioned – prompted a 4% decline in the index from its intra-month peak.


  • Region-wide factors – 2% appreciation in the euro, a signal from the ECB that their rates will be hiked more slowly going forward and no further escalation in the Russia-Ukraine War – were behind the bounce in most of the European emerging markets. This even included Poland (up 15%, with FX rate up 4.5%), despite its dispute over rule of law risking access to EU funding.


  • Brazil (up 6%) saw, at the very end of the month, leftist challenger Lula beat rightist incumbent Bolsanoro by 1.8 points in the second-round presidential election, a smaller margin than predicted by polls, and leaving open the question of how orderly a fashion Bolsanaro will concede. Lula now has to manage congress, over which he exerts very little control (his own political bloc has 16% of lower house seats), in order to cut the fiscal deficit (7.5% of GDP in 2023) and pass meaningful reforms. Brazil equities and currency are cheap versus the historical average and cheaper than most large emerging market peers. And, for now, commodity prices are a tailwind.

  • Mexico (up 12%, with FX rate up 1.4%) was boosted by decelerating and below-expectation inflation – 8.53% yoy in the first half of October versus the 8.63% Reuters consensus forecast. Although core inflation was worse than expected (8.39% versus 8.31%), expectations are building that the end of policy tightening is on the horizon. Mexico's real interest rate (policy rate minus last reported inflation) is positive 0.6%.

  • Peru (up 12%, with FX rate flat) was driven almost entirely by its largest stock, Credicorp (63% weight in MSCI Peru, up 17%), despite no significant company-specific news (the next quarterly results are on 3 November, trailing PB of 1.7x is a 20% discount to the five-year median). The policy rate was hiked again at the start of the month, by 25bps to 7%, as expected, although the central bank's outlook statement suggests the bulk of tightening is over.

    Meanwhile, the political backdrop remains as toxic as always, with the emergence of yet another challenge for President Castillo, in the form of the attorney general's constitutional complaint of criminal activity within the government. Castillo already faces five criminal investigations and has survived two impeachment attempts by a Congress that is highly fragmented and in no way in his control.


  • Egypt (down 4%, with FX rate down 15%) finally concluded a deal with the IMF. Monetary and fiscal policy tightening and a more flexible currency regime are likely the short-term term conditions of the deal. It remains to be seen how demanding the conditions are for longer-term structural reform, which levels the competitive playing field between state or military-owned enterprises and the private sector.

    The 200bps policy rate hike to 15% means that the real interest rate is still negative 1.8%. Fiscal deficit forecasts from the IMF, prior to the deal, averaged 7% over 2022 and 2023. Even after the 15% devaluation, 12-month non-deliverable forwards imply another 12% devaluation over the coming year.

    Overall, there is likely to be some pain for growth ahead, which may not be reflected in the consensus earnings growth forecast of 9% in 2023. However, forward PE of 6.4x, with over a 4% forward dividend yield, equates to over a 30% discount to the five-year median.

Our monthly review of EM and FM equities is laid out as follows:

  1. The month's performance in Emerging and Frontier in one chart.

  2. Low-cost manufacturing valuation chart: Cheaper in China, Hungary, the Philippines, Poland.

  3. Commodities valuation chart: Chile and Peru in Copper, and Colombia, Oman, Qatar in Oil are cheaper than Saudi Arabia and the rest of the GCC.

  4. Tourism valuation chart: Cheaper in Croatia, Georgia, Iceland, Jamaica, Mauritius, the Philippines, Thailand. 

  5. Technology valuation chart: Cheapest tech in EM is in China, Taiwan, and Small EM.

  6. Global performance, valuation, liquidity summary table: Equities, commodities, currencies.

  7. EM global equity strategy overview in under 1,000 words.

  8. Our updated EM Country index scores.

  9. Links to recent reports on strategy and economics in EM.

1) The month in one chart

October performance and valuation of Emerging Markets

2) Manufacturing: China Covid disrupts related suppliers but long-term shift to Mexico, Vietnam et al

Manufacturing exposure via EM equities relatively cheap in China, Hungary, Korea, Philippines, Poland

3) Commodities: Demand destruction fear

Net Commodity Export exposure via EM equities relatively cheap in Chile and Peru (Copper), Kuwait, Oman, Qatar (Oil & Gas), Brazil (Iron, Food), South Africa (metals)

4) Tourism: Post-Covid recovery underway

Tourism exposure via EM equities relatively cheap in Croatia, Georgia, Iceland, Jamaica, Mauritius, Philippines, Thailand

5) Technology: Higher risk-free yields a headwind for valuation of long-duration cashflows

Cheapest Tech in EM is in China, Taiwan and Small EM

6) Performance and valuation summary

7) EM equity strategy update: Cheap tech, commodities, tourism, manufacturing and reform

MSCI EM is down 29% year to date and MSCI FM is down 28% – both have underperformed DM, which is down 19%.


  • The peak in US policy rates may be on the horizon, which may portend a peak in US dollar strength too (the US real effective exchange rate is near a two-decade high).

  • The largest EM by far, China, has the rare capacity for stimulus.

  • There are pockets of EM, Saudi Arabia and the GCC that have the crude oil exports and FX reserves to provide perhaps as much downside protection as any developed market after the US.

  • Covid is dissipating globally and that is positive for EM manufacturers (Vietnam, Bangladesh, Mexico, etc.) and EM tourism economies (Thailand, the Philippines, Dubai, Iceland, Mauritius, etc.) as demand recovers.

  • Some of the EMs with external account stress are seeking the stamp of policy credibility from the IMF and help from geopolitical allies (eg Argentina, Egypt, Pakistan, Sri Lanka).

  • Valuation across most of the EM and FM spectrum appears to reflect a lot of distress already; both indices are on over 30-40% discounts to their respective five-year median PE.


  • Russia-Ukraine can escalate economically (more gas supply suspensions from Russia), militarily (eg a spread to separatist parts of Georgia and Moldova, provocation on the Finland border or in the Baltics) and geopolitically (a more forceful 'Western' response to the 'neutral' stance of China and India).

  • China’s regulatory crackdown and zero-Covid policies have not ended and its property debt crisis has not been resolved, and the continued emphasis on public infrastructure spend may risk more capital misallocation.

  • Political protest movements against a backdrop of rocketing food prices or acute inequality pose a threat to the smooth working and, in some cases, survival of any incumbent government, whether autocratic or democratic, poor (Africa, South Asia) or relatively affluent (LatAm, East Europe).

  • Brazil, India and South Africa are not structurally reforming, with re-election the priority in all three. Reform efforts in the likes of Egypt, Indonesia, Pakistan, the Philippines and Vietnam have also been derailed by the economic stress resulting from Covid as well as food and fuel inflation.

The only guides for us remain a combination of equity market valuation and liquidity, short- and long-term macroeconomic growth prospects, economic policy credibility and currency risk.

These are all key components of the customisable Tellimer EM Country Index, which also incorporates sanctions exposure, as well as longer-term ESG and climate risk factors. Contact Tellimer Insights Sales to learn more.

Recap of our top-down strategy view

Our top-down strategy view remains one grounded in active country selection over passive index-tracking and exposure to a mix of manufacturing, tourism and tech, where this exposure is cheap relative to history. That is because we try to strike a balance between short and long term, with a value bias.

That is not everyone’s approach, and the EM Country Index can be flexed to reflect different approaches (eg more risk-averse, less valuation-centric).

The global backdrop features the following.

  • Higher oil and food commodity prices (while global growth is decelerating it remains positive, the legacy of under-investment in commodity extraction persists and the Russia-Ukraine war disrupts two major suppliers).

  • Dissipating global Covid disruption (higher levels of vaccination and prior infection, prior deaths of the most vulnerable, less fatal variants and intolerance of further lockdowns) but lingering lockdowns in China, which remains wedded to a zero-Covid strategy.

  • Strengthening US dollar (as the US Fed embarks on a rate hiking cycle and US yields move up, a prolonged Russia-Ukraine war raises European stagflation risk and drags down the euro), albeit the US real effective exchange rate is now at approximately a two-decade peak.

  • Except for China, there is much less room for policy stimulus in emerging markets (as Covid-era fiscal deficits are narrowed and interest rates are hiked to cope with higher inflation).

  • Pressure on local investor flows in those EMs where local interest rates and bond yields are moving up to combat inflation.

All of this adds up to a continuation of uneven, stuttering growth across EM, and a greater emphasis on country, sector and stock selection.

A mix of cheap commodities, tourism, manufacturing and tech... while structural reform has paused

  1. China technology (particularly Alibaba and Tencent) is among the cheapest and most liquid exposure to structural growth, which has benefited, of course, from Covid-19 disruption but will outlast it, albeit the entire sector now has to conform to the diktats of the one-party state (which is what their de-rated valuations already reflect).

    State interference and tougher regulation in publicly listed tech is only now becoming more prominent, and may not yet have run its course in other markets, eg Russia tech.

    Tech adoption cycles (with 5G and the metaverse next round the block) still drive a favourable long-term outlook for most of Korea-Taiwan tech hardware and Indian IT services, albeit there is currently little insulation from cyclical headwinds.

    For Taiwan and TSMC, in particular, it is unclear whether there is as yet adequate reflection of China conflict risk.

    In small EM, where scarce tech exposure has driven premium valuations, among the most liquid plays, Mercado Libre is looking cheaper relative to its history (and is profitable) than Sea.

  2. Commodity exporters, particularly those not at significant valuation premia versus history, offer exposure to the recovery in global growth. These are found mainly in LatAm: Brazil in large EM in iron ore and agriculture exports, Colombia in oil, and Chile and Peru in copper. All of these have de-rated on concerns over a leftward shift in government, even though many of their current problems were not addressed under the current or preceding right-leaning governments.

    South Africa is also cheap relative to its history, arguably reflecting what are now well-understood risks around the ruling ANC party's division, vested interests blocking structural reform, and chronic social inequality and youth unemployment.

    Russia and Saudi Arabia clearly have an oil price tailwind in their favour, but Russia's investment case, for foreign investors, has been pulverised by its over-reach in Ukraine and the central bank sanctions this has led to, while Saudi Arabia is, on trailing PB at least, fully valued relative to history.

    On the flip side of the commodity trade are the fuel and food importers with low income per capita (ie high portion of household spend on these items), whose growth, inflation and currency are all at greater risk; Bangladesh, Jordan, Lebanon, Pakistan and the Philippines are the most vulnerable in this regard.

  3. Tourist destinations such as Thailand in large EM, and others at attractive valuation versus history in small EM – such as Croatia, Georgia, Iceland, Mauritius and the Philippines – offer exposure to the release of pent-up demand after Covid disruption.

    Other tourist markets that are recovering, but where equity valuations have already positively re-rated, include Dubai and Greece.

  4. Alternative manufacturing locations to China that should benefit from US-China friction – Bangladesh, Malaysia, Mexico and Vietnam – are reasonably valued compared with history (although Bangladesh's floor price limits in the equity market are distorting true price discovery).

  5. Structural reform (self-help) is a slow and stop-start process but, despite the Covid shock and domestic political challenges, this continues in Indonesia, which is cheap relative to history, although we have become less optimistic on reform prospects in two other cheap markets: 1) Pakistan (with the Khan-led PTI government out of power); and 2) the Philippines (with dynastic politics taking centre stage).

India is less appealing than before

India offers exposure to many of these traits (particularly leap-frogging technology, alternative manufacturing location to China and pro-business reform), but it is no longer as cheap relative to history, particularly as monetary policy tightens, or as committed to reform as it was (with Prime Minister Modi's priority now the next general election, in 2024).

Off-limit markets: Argentina, Lebanon, Nigeria, Turkey, Sri Lanka, Russia

A poor, foreign-investor-unfriendly policy environment rules out the following markets: Argentina, Lebanon, Nigeria, Turkey, Sri Lanka and Zimbabwe. There is sufficient opportunity at appealing valuations elsewhere in EM to avoid these.

Sanctions and capital controls, driven by geopolitics as opposed to populism or unorthodox monetary policy, take Russia off limits.

Non-country strategy market: Abu Dhabi

Abu Dhabi, which is increasingly dominated by related party companies – eg International Holding Company, Alpha Dhabi and Aldar – has also become something of a special situation, with the interplay between these companies already more important than, for example, oil prices or regional geopolitics, for trading volume and country index performance.

8) EM Country Index scores

Our index weights c30 factors on growth (short and long term), policy credibility, politics, sanctions, ESG, equity valuation and liquidity.

Tellimer EM Country Index ranks emerging markets and US

The weights in the index can be changed in order to model different global themes and portfolio styles.

China, Taiwan, and Vietnam in Asia, Chile in LatAm, the UAE in the Middle East, Hungary, in Europe, and Mauritius in Africa, are among the highest-ranked out of c50 emerging equity markets in our new Tellimer EM Country Index.

Brazil, South Africa and Russia among large EM equities and Egypt, Kuwait, Nigeria, Pakistan and Turkey among small EM equities are among the lowly ranked.

Around 85% of the index's weight covers factors relevant for all asset classes, with the remaining 15% specific to equities. For foreign direct investors wishing to assess a wide range of country risk factors, this model can be adjusted by simply applying zero weight to the equity market factors.

Because trading liquidity is a part of the equity component, and China is much more deeply traded than all other EM, this has a major bearing on China's score. If China and the US were only as liquid as Taiwan, for example, then their scores would drop from 139 and 122 to 67 and 19, respectively.

Contact Tellimer Insights Sales to learn more.

9) Recently published reports


Emerging market equities are cheap and reflect well known risks

IMF/WB Annual Meetings, October 2022 (Culverhouse, Curran)

Structural reform has disappeared in emerging markets: Where might it revive?

Manufacturing exports in emerging markets: The elixir of growth

IMF updated forecasts show even faster growth in emerging vs developed: 2 charts

IMF lending since the Ukraine war: Where are we? (Culverhouse)


OPEC+ output cut pains oil importers, Biden, anti-Russia bloc

Food prices cool again, back to pre Russia-Ukraine War level


IEA sees faster Renewables transition, but who pays or votes for it?

FATF updates its Grey List, one piece in the ESG mosaic

Murders in emerging markets: Now you can travel again, where's safer?

Education and innovation in emerging markets: A look after World Teachers' Day

Central bank independence: An adult in the room, whether UK or emerging markets?


Semiconductors split by US-China de-coupling


China: What happened to Hu?

China: Xi's coronation speech changes little

Malaysia early election will not fix its politics but its equities are cheap

Pakistan's policy rate and debt relief plans on hold (Curran)

Sri Lanka: Upgrade to Buy as bonds drop to 25 cents on the dollar (Curran)


Poland-EU dispute: Slower growth may dictate a de-escalation

Turkey: Markets yawn at rate cut due to broken transmission mechanism


Brazil: Lula beats Bolsonaro – winning was hard, governing will be harder

Brazil: Bolsanaro’s better-than-expected vote takes election to 2nd round

Peru central bank hikes again but signals new phase of moderation

Middle East

Kuwait's new government faces old problems


Egypt: IMF agreement and currency devaluation reduce risk of crisis (with Curran)

South Africa's MTBPS reveals stronger consolidation path (Curran)

Nigeria: Demonetisation won't salvage the naira – not a game-changer for banks (Ogabi)

Nigeria: Securitising CBN loans may not signal the end of monetisation (Ogabi)

Nigeria's worst floods in a decade (Ogabi)

Nigeria's NNPC makes bold acquisition amid IPO plan (Ogabi)

Ghana: IMF statement gives little away (Culverhouse)

Tunisia's IMF agreement reduces default risk but Board approval still pending (Curran)