Strategy Note /

Contrarian calls in emerging market equities

  • We revisit the investment case of eleven EMs which have underperformed year to date and are cheap versus history

  • Large EM: commodity exporters Brazil and South Africa, hit by Covid and domestic politics; regulation-hit China Tech

  • Small EM: commodity Chile, Colombia, Peru; big pop Indonesia, Pakistan, Philippines; trapped Malaysia; high rate Egypt

Contrarian calls in emerging market equities
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
14 September 2021
Published byTellimer Research

Screening for contrarian candidates

Underperforming and cheap

Our top-down screen of EM equity market performance year to date and valuation versus history highlights the following eleven pockets as underperforming and cheap:

  • Large EM: Brazil, South Africa.

  • Tech: China Applications.

  • Small EM and FM:

    • Africa: Egypt.

    • Asia: Indonesia, Malaysia, Pakistan, Philippines.

    • LatAm: Chile, Colombia, Peru.

We have excluded markets where there are capital controls (Argentina), significant FX risk (Sri Lanka, Turkey), or repatriation friction (Nigeria).

Outperforming and expensive

The following are outperforming and now expensive versus history:

  • Large EM: India, Saudi, Russia.

  • Tech: Small EM-FM Tech, Taiwan Tech.

  • Other Small EM-FM:

    • Africa: Kenya (Safaricom).

    • Asia: Bangladesh.

    • Middle East: Abu Dhabi.

    • Europe: Hungary, Kazakhstan, Romania.

Emerging Market Equities Performance and Valuation

A framework for analysing contrarian calls

Below we focus on four aspects of the investment debate in these eleven contrarian candidates:

  1. Post-Covid normalisation.

  2. Vulnerability to sustained global inflation and, ultimately, rising US yields.

  3. Growth and reform drivers (including political risk).

  4. How much the risk associated with these factors is either misunderstood by or already sufficiently reflected in valuation.

None of the candidates screens well on all four of these dimensions.

However, in the appropriate global environment (ie depending on what is the global concern of the moment) there is plenty to recommend each one for those interested in a contrarian approach. Consider these examples.

  • Brazil is cheap versus its history, albeit less so on an absolute basis, is positively geared to sustained commodity price inflation, may be the closest to normalising after Covid, but has political obstacles to implementing much-needed reform to reduce its fiscal deficit and government debt.

  • China Tech is the cheapest pocket of global Tech, has plenty of market growth ahead of it, within what remains a sufficiently robust political economy with a relatively low-risk currency, but the sector lacks any visibility on when the whirlwind of punitive new domestic regulation will blow over.

  • Chile is cheap and has long-term structural growth (driven by copper demand in the transition to renewable energy) but it remains vulnerable to Covid lockdowns (which, in turn, exacerbates its main structural vulnerability of acute economic inequality).

  • Pakistan is very cheap (ie risks are widely understood and consensus expectations are very low) and could be the most transformed by internal institutional structural reform, but it is vulnerable in a scenario of persistent commodity price inflation and rising US yields.

(1) Potential for post-covid normalisation

Life after Covid: High degree of protection and re-opening

(2) Vulnerability to sustained global inflation

EM central bank preparedness for inflation or FX pressure

(3) Growth and reform potential

Growth and reform: positive drivers versus risks

(4) Valuation

Valuation check (1): is earnings growth fairly priced?

Valuation check (2): is dividend defence fairly priced?

Related reading

Latest country-specific reports

Large EM

Brazil report

South Africa report

China Tech report

Small EM

Chile report

Colombia report

Egypt report

Indonesia report

Malaysia report

Pakistan report

Peru report

Philippines report

Thematic reports

If inflation persists which EMs are best prepared?

Covid in EM: Where's already infected, vaccinated and re-opening

Emerging-Frontier Equity Monthly – August: Taper, Covid, Afghanistan

Related data

Most of the data analysed in this report is available across over 50 EMs via the Tellimer Emerging Markets Investability Matrix – accessible to full to subscribers.