Commodity price beneficiaries in EM

  • Commodity upswing could be driven by (1) recent restraint on new capacity, (2) policy-led demand pick-up, (3) weaker US$
  • Commodity export exposure In large EM implies this would suit Brazil, South Africa more than China, India, Korea, Taiwan
  • In small EM-FM a commodity upswing would suit Africa, GCC, LatAm, former CIS-Russia more than Asia
Commodity price beneficiaries in EM

A bullish case on commodities (and commodity-related equities) might be grounded in the following four factors:

  1. Policy-led (both monetary and fiscal) increase of overall demand and, particularly, infrastructure (in both the US and China);

  2. Recent constrained capacity addition resulting from poor access to capital (in turn, due to the reallocation of capital globally to Technology sectors, weak commodity prices in recent years, Covid-19 disruption, ESG investor concerns);

  3. Weakening US$ and accelerating US inflation outlook (driven by particularly aggressive policy stimulus in the US and less extreme flight to safety as Covid-19 lockdown disruption subsides); and

  4. A fallout of favour of Technology should investors worry more about high valuation multiples, antitrust regulation in the US, nationalist regulation in the US and China ("splinternet" for applications and duplicated supply chains for hardware), and China-Taiwan-US conflict.

Commodities up 30% from April low but far off prior peaks

Commodity export exposure in EM

For those more bullish commodities, we depict below the economic exposure of large and small emerging markets to commodity exports, using UNCTAD data from 2017.

If commodity prices pick up who benefits in EM?

In broad terms, Sub-Sahara and North Africa, LatAm, Former CIS-Russia, and GCC benefit relative to Asia and, more specifically:

  • Large EM: Brazil and South Africa benefit relative to China, India, Korea, and Taiwan in large EM;

  • Asia small EM-FM: Indonesia, Malaysia, and Thailand, benefit relative to Bangladesh, Pakistan, Philippines, and Sri Lanka;

  • LatAm small EM-FM: Chile, Colombia, and Peru benefit relative to Argentina and Mexico;

  • Wider Europe small EM-FM: Iceland, Kazakhstan, Russia, and Ukraine benefit relative to Turkey and Romania; and

  • GCC-Levant: GCC, Iran, and Iraq benefit relative to Jordan and Lebanon.

Obviously, commodity bulls will want to distinguish between commodities; eg traditional infrastructure (iron ore, steel), new power generation and transport technology (copper, cobalt, lithium), traditional transport (oil), food (soybean, corn), and stores of value (gold, silver).

Our country preferences still based on commodity caution

In our equity strategy outlook we assume that most commodity prices remain anaemic because of persistent demand weakness (we are sceptical that Covid-19 disruption fades quickly and that other large economies replicate the rapid recovery reported in China), particularly in the case of oil (given the excess capacity represented by US shale and the strain on OPEC+ discipline). See Emerging-Frontier Equity Monthly, October: Tech leads and ytd laggards pick up.

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