Strategy Note /

Contrarian sells in emerging market equities

  • We revisit the investment case of 11 EMs that have outperformed year-to-date and are expensive versus history

  • Large EM: Teflon Modi-led India, oil price-driven Russia, negative real rate-fueled Saudi, regulation-immune Taiwan Tech

  • Small EM: Locally driven Abu Dhabi, Bangladesh, EU-linked Hungary, Romania; off-EM benchmark Kenya; overseas-listed Tech

Contrarian sells in emerging market equities
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
16 September 2021
Published byTellimer Research

In this report, we run a top-down screen and analysis of 11 pockets of emerging markets that have substantially outperformed, may struggle with normalising post-Covid, are vulnerable to sustained inflation and an ultimate rise in US yields, have material structural growth risks, and look expensive on an absolute basis (either relative to earnings growth, or to downside protection from dividend payout, or, in the case of Tech applications, relative to peers).

The markets and sectors we consider are, in Large EM, India, Russia, Saudi Arabia and Taiwan Tech (where TSMC on its own almost counts a country, given its near 7% weight in MSCI EM), and, in small EM, Abu Dhabi, Bangladesh (large caps only), Hungary, Kazakhstan, Kenya, Mexico, Romania, and internationally-listed Tech.

While none of these "contrarian candidate sells" comes out poorly on all metrics, the ones that may be the most vulnerable, should consensus focus on downside risk or reallocate to relatively cheap underperformers, are the following.

  • Large EM:

    • India – likely to continue struggling with Covid, reliant on easy local monetary policy.

    • Saudi – beneficiary of large negative local interest rate and with perhaps the most serious long-term challenges (hydrocarbon dependence, scarce water, political risk).

  • Small EM:

    • Hungary – struggling with twin deficits, at risk of EU isolation and looking over-valued.

    • Mexico – behind the inflation curve and looking over-valued on an absolute basis.

    • Small EM Tech – should there occur a change in investor appetite to fund Tech App companies building their product and customer base then some internationally listed companies in the sector look clearly more stretched on valuation, eg Sea compared to Mercado Libre or Jumia.

While Abu Dhabi is not in this top-down list of the relatively most vulnerable, it deserves a special mention. We note that 27% of the local equity index comprises two related-party companies, which are essentially investment vehicles: the larger one, International Holding Company, is up c250% ytd, and its associate, Alpha Dhabi Holding is up c80% since its June 2021 IPO.

This report should be read as an analysis of those parts of EM that have performed well but may be vulnerable, rather than sell recommendations on specific listed securities.

Screening for contrarian candidates

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.

    • Asia: Bangladesh.

    • Middle East: Abu Dhabi.

    • Europe: Hungary, Kazakhstan, Romania.

    • Tech: Sea.

In LatAm, Mexico has significantly outperformed (mainly thanks to its close export and remittance links with the fast-recovering US) but it is not expensive versus history. However, we include it in the countries we analyse below given it is the main regional outperformer.

Underperforming and cheap

Our top-down screen of EM equity market performance year-to-date and valuation versus history highlights the following 11 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.

For our full discussion of these candidate contrarian buys, please see this report. In this report, we excluded markets where there are capital controls (Argentina), significant FX risk (Sri Lanka, Turkey) or repatriation friction (Nigeria).

Emerging Market Equities Performance and Valuation

A framework for analysing contrarian sells

Below, we focus on four aspects of the investment debate in these 11 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.

(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?

Small EM Tech looks expensive versus global peers but there is large variation; eg Sea versus Mercado Libre

Related reading

Latest country-specific reports

Large EM





Small EM

Abu Dhabi






Small EM-FM Tech

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 in full to subscribers.