Strategy Note /

Commodity exposure in EM: Stick or twist

  • Average commodity prices, ex-gold, are down 8% from the ytd peak, seen at the start of June, as recession fear sets in

  • The ytd outperformance of large EM commodity exporters eroded this month; Brazil and Saudi are down c15% so far in June

  • We scan EM for net export exposure to commodities overall, and fuel and food individually, and compare with valuation

Commodity exposure in EM: Stick or twist
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
21 June 2022
Published by

Average commodity prices, ex-gold, are down 8% from the ytd peak, seen at the start of June, as global recession fear sets in.

Commodity prices off recent peak but still up c30% ytd

Much of the ytd outperformance of the largest and most liquidly traded emerging market commodity exporter equity markets has been erased this month – Brazil (5% of MSCI EM) and Saudi Arabia (4%) are down 17% and 13%, respectively, in US$ total return terms.

Commodity exporter equity markets Brazil and Saudi have seen much of their year to date outperformance eroded

They remain ytd outperformers versus EM, up 3% and 1%, respectively, versus EM down 18% (which is dragged down by declines of 13-26% in the four countries that account for over 70% of the index, China, India, South Korea and Taiwan).

Brazil has also been hit this month by ramped-up expectations of US rate hikes – these spill over into tighter local monetary policy and higher borrowing costs (with government debt/GDP of 92% and a fiscal deficit of 7.6% in 2022, according to IMF forecasts), and, in turn, into FX rate weakness.

Saudi Arabia was arguably more vulnerable, with high valuation relative to the historical average – trailing price/book was on over a 50% premium to the five-year median at the mid-May 2022 peak for the Tadawul index – and was likely hurt by contagion from the collapse of crypto assets (given the diversified nature of most portfolios of the Saudi high-net-worth investors that dominate trading on the Tadawul).

Commodity exposure in EM

Below, are three charts to quantify commodity exposure across the emerging markets:

  • Net commodity exports (imports) as a percentage of GDP in 2019;

  • Net fuel exports (imports) at US$100 oil;

  • Net food exports (imports) at current average food prices.

Commodity net export exposure in emerging markets

Commodity fuel exposure in emerging markets

Commodity food exposure in emerging markets

EM commodity stick or twist

The drivers for buoyant commodity prices – restrained capex, ESG friction, Covid and conflict-related supply chain disruption – likely persist.

But fears of global recession – driven by the combination of monetary policy brakes on US and EU growth, recurring China Covid lockdowns and demand destruction from high commodity prices and borrowing costs in poorer economies – is driving a pull-back.

For EM equity investors, this is a stick or twist moment: commit more capital to net exporter beneficiaries of what are still high commodity prices, taking advantage of this retreat in valuation multiples, or revisit those net importers on the wrong end of the commodity trade, whose valuations are already significantly de-rated.

As usual, we don't consider ourselves clever enough to call commodity prices, and so our approach remains to advocate a mix of different exposures – commodity, manufacturing, tourism, technology – but screened for relative value.

Please see EM equity strategy recap during the market rout and our EM Country Index for a ranking of markets based 30 factors on growth, policy, politics, sanctions, ESG, equity valuation and liquidity.

Below, we chart current equity market valuation multiples, segmenting countries according to net commodity export exposure.

Commodity exposure versus valuation in EM equity markets