Strategy Note /

Dividend protection in EM for hawks: Emerging-Frontier Equity Monthly – August

  • Powell's hawkish talk jolts riskiest parts of EM. But China rate cut and stimulus a boon for Asia supply chain

  • Protection for hawks in high real rates (eg Brazil, Saudi, Vietnam) or high dividend yields (eg Greece, Romania, Taiwan)

  • Prior to Jackson Hole, relatively high risk Argentina, Egypt, Pakistan, Turkey, Sri Lanka in small EM all outperformed

Dividend protection in EM for hawks: Emerging-Frontier Equity Monthly – August
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
29 August 2022
Published byTellimer Research

At the close of 28 August, MSCI DM was down 2% month to date, with most of that drop occurring in the days before and the day of US Fed Chair Powell's hawkish speech at the Jackson Hole gathering. MSCI DM ex-US Tech was down 4%. The outperformance of EM (up 2%) and FM (up 3%) may simply reflect the fact that most EM and FM markets closed before Powell's remarks.

Below we screen emerging markets for real interest rates (which might enjoy more insulation from a higher-for-longer US rates environment) and those with high dividend yield (both in absolute terms and relative to local policy rate).

The other themes highlighted in the performance of EM equity markets this month and our review below are the good US regulatory news for China Tech App listings but poor data on the macroeconomy, US Speaker Pelosi's provocative visit to Taiwan, a clear and obvious recovery in tourism markets, the disconnect between commodity exporter equity market performance and commodity price softening, and contagion in European EM from the EU energy crisis.

Protection in a higher-for-longer US rates environment

At least prior to Jackson Hole, many of the risker parts of EM were among the largest outperformers, amid the prevailing consensus that US inflation, and by implication US rates, may be at a peak. Brazil, in large EM, and Argentina, Egypt, Pakistan, Sri Lanka, and Turkey, in small EM, were up, month to date, 7% to 23% (in US$ total return terms).

However, a higher-for-longer US rates environment suggests looking for protection in EM equity markets with relatively high real interest rates and dividend yields — for those who think Powell will be true to his hawkish rhetoric, or think that markets will, at least, continue to react very sensitively to his remarks (ie that he still has credibility).

  • Zero to positive real interest rates prevail in, for example, Brazil, China, Saudi in large EM, and Oman, Mexico, UAE in small EM.

  • Equity dividend yield equal to or above policy rate prevails in, for example, China and Taiwan in large EM, and Greece, Kuwait, Morocco, Oman, Qatar, Romania, UAE in small EM.

Real interest rates in emerging markets

Equity dividend yield minus policy rate in emerging markets

Rare good news for China Apps but weak monthly economic data, and Pelosi's provocation

The US and China reached an agreement which may avoid the US de-listing of Chinese companies, under the Holding Foreign Companies Accountable Act. The Public Company Accounting Oversight Board (PCAOB) may now be granted full access to the working papers of Hong Kong and China-based accounting firms. In early August the SEC listed 162 Chinese companies at risk of de-listing.

The wider signal from this agreement is that fears of a full pullback of external capital flows from the Chinese side look overblown. That matters in the context of sustained funds inflow and China's very small weight in global indices – eg 3.5% in MSCI ACWI – compared to its much larger 10.6% share of global stock market capitalisation.

It also suggests, within a month of US Speaker Pelosi's provocative visit to Taiwan, that there is scope for cooperative outcomes between China and the US – might trade tariff cuts be next?

China still under-represented in global equity indices

On the other hand, July monthly data on industrial manufacturing, retail sales and asset investment were all weaker than consensus expectations. The coincident policy rate cut was also unexpected. They all served as a reminder that the pick-up in growth remains a stuttering one.

We remain positive on China. The short-term tension in the China investment case remains between the rare capacity for policy stimulus (real interest rates are zero, gross government debt is below 80%, and total external debt is below 15% of GDP), on the one hand, but less benign domestic (zero-Covid strategy, property slump, regulatory crackdown on Tech and other sectors) and external (recession and inflation risks in export markets, geopolitical friction with the US) conditions, on the other.

China economic activity stuttering pick up

Tourism equity markets perk up as travellers return

Post-Covid international travel is rebounding, eg Thailand's 46% mom increase in July and 15% mom increase in the first half of August (with both still under 40% of the levels seen in pre-Covid 2019), and EM tourism-heavy equity markets generally outperformed: eg Georgia (up 31%), Mauritius (up 12%), Thailand (up 7%), and Philippines (up 6%).

Thailand tourism recovering but a very, very long way to go

Commodity exporter equities outrun commodity prices

Hard commodities were mainly down on global growth concerns, with Brent down 8% (albeit recovering from a 17% drop after Saudi Energy Minister Prince Abdulaziz hinted at potential OPEC+ output cuts), steel down 7%, iron ore down 5%, but copper up 3%.

Saudi's spare oil capacity

Soft commodities were also down, with palm oil, soybean, sugar, and wheat down 2% to 5%. The UN FAO Food index was down 9% in July, its fourth consecutive monthly decline and back to the level seen prior to Russia's invasion of Ukraine.

Global food prices back to pre-Russia invasion of Ukraine levels, after biggest monthly drop since October 2008

Equities in the main commodity exporters in EM moved largely counter to these underlying commodity price declines: eg Brazil (iron ore and food) was up 12%, Saudi (oil) was up 4%, and Indonesia (palm oil) was up 4%.

For commodity importers, on the wrong side of the fuel and food trade for so much of this year, a softening in prices is obviously positive but the starting point is so high that the pace of decline will have to sustain for it to bring material relief.

European EM dragged down euro concerns

The US Dollar (trade-weighted) strengthened 1.4% (up 7.5% ytd), in response to expectations of higher US rates for longer, and the euro declined 2.5% (down 12.3% ytd), amid concerns over energy prices and eurozone periphery debt. Equities in European EM suffered, eg Czechia and Poland were down 8% to 9%.

European energy crisis post Russia-Ukraine War

EM opportunity or worse to come?

MSCI EM is down 18% year to date and MSCI FM is down 14%.


  • 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 DM after the US.

  • Covid should dissipate 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 (Argentina, Egypt, Pakistan and, albeit very belatedly, Sri Lanka).

  • Valuation across most of the EM and FM spectrum appears to reflect a lot of distress already; both indices are on c25% 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 has still not ended, its zero-Covid strategy appears increasingly inappropriate, with the advent of the less-lethal Omicron variant, 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.

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).

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

  3. Commodities valuation chart: 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 Egypt, Georgia, Mauritius, the Philippines, Thailand. 

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

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

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

  8. EM Country scores updated.

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

1) The month in one chart

August performance and valuation of Emerging Markets

2) Technology: Hawkish US Fed a headwind for valuation of long-duration cashflows

Cheapest Tech in EM is in China and Small EM

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, excluding Russians

Tourism exposure via EM equities relatively cheap in Croatia, Egypt, Georgia, Mauritius, Philippines, and Thailand

Russian tourists are big economic drivers in these countries

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

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

6) Performance and valuation summary

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

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, 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 tech, commodities, tourism, manufacturing and reform

  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.

    While tech adoption cycles (with 5G and the metaverse next round the block) still favour pricing for most of Korea-Taiwan tech hardware (also helped by the semiconductor shortage) and Indian IT services, valuation already reflects this. For Taiwan and TSMC, in particular, there is arguably no 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 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 Egypt, Georgia, 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, Greece and Iceland.

  4. Alternative manufacturing locations to China that should benefit from US-China friction – Bangladesh, Malaysia, Mexico and Vietnam – are reasonably valued compared with history.

  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 less appealing than before, Kenya risks now priced in

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 should monetary policy tighten at any point this year, or as committed to reform as a year ago (with Prime Minister Modi's priority now on the next general election in 2024).

Kenya, in small EM, similarly offers exposure to some of these traits (particularly leap-frogging technology and tourism revival) but the distraction of the election lingers, taking away attention from structural reform and exacerbating external liquidity pressure. Yet the valuations of both the largest stock, Safaricom, and the banks may be sufficiently discounted relative to the historical average to reflect these risks.

Off-limit markets: Argentina, 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 – 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.

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, 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.

Tellimer EM Country Index ranks emerging markets

9) Recently published reports


Food prices drop in July, down 9% mom, albeit still up 55% from trough

IMF flags overvalued dollar and undervalued EM currencies (Curran)

Updated alternative dataset showing currencies at risk of devaluation (Curran)

High-yield EM credit claws back losses but path ahead is perilous (Curran)

Passport power and why it matters


Gender gap in emerging markets is more than an ESG special interest


China: Still positive despite weak monthly economic data

China's response to Pelosi trip does not trigger crisis (yet)

India and Pakistan 75th anniversary in 10 charts

Pakistan: Khan's support endures despite repression, implying Army is split

Pakistan: SBP on pause as IMF optimism and lower trade deficit boost rupee (Curran)

Sri Lanka: Upgrade '22s to Hold on collapsed premium (Curran)

Sri Lanka: President hints at inclusion of local debt in restructuring (Curran)


Turkey: Lira pressure to increase after irresponsible rate cut (Curran)


Argentina: Sergio Massa appointed new economy minister (Culverhouse)

Colombia: The challenges ahead for the new president (with Culverhouse)

Middle East

Saudi revisited: Pilgrims back for Hajj, might investors return too?

Dubai is back! But global headwinds a serious concern

UAE is on a tear: How best to gain exposure (Shah)


Egypt: Downgrade local debt to Sell amid devaluation concerns (with Curran)

Kenya: Elections still too close to call (with Curran)

Nigeria: CBN's elevated funding to the government increases risk to the naira (Ogabi)

Tunisia: Referendum solidifies shift to one-man rule (Curran)