Strategy Note /

EM-FM Equity Strategy: The courage to change nothing

  • This presentation, based on previously published reports, accompanies a conference call on equity strategy on 26 March

  • There is no island in EM which is isolated from coronavirus, oil price collapse, trade war, and capital outlflow risks

  • Indeed an overly defensive shift in portfolios creates vulnerability to any ultimate recovery in risk appetite

Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
26 March 2020
Published byTellimer Research

The emerging and frontier market crisis is driven by four factors:

  1. The coronavirus war;
  2. The oil price war;
  3. The trade war; and
  4. The reduction in global risk appetite, reflected in dollar strength and less foreign capital flow to emerging markets.

In the emerging markets, a self-sufficient, isolated, island economy, immune from all these factors does not exist. The four factors are too unquantifiable and too universal, across emerging equity markets, to make searching for safe havens worthwhile. Furthermore, in the event of a return of global risk appetite, those companies and countries regarded as most vulnerable in the current environment would likely be the ones to rally the hardest.

Therefore, the rational response, for anyone who is restricted to emerging market public equity, as opposed to multi-asset global portfolios, is to carry on as before: the companies you liked before the crisis are the ones you should still like; it is just that everything has been de-rated. This is not defeatist, end-of-world type thinking, but rather the most rational response to an eventual return to normality.

This presentation is based on previously published research and is intended to accompany a conference call hosted on 26 March 2020. It is not intended as a comprehensive digest of all our top-down research. It supports a discussion of the crisis in emerging markets, the futility in searching for an island of immunity, the courage to change nothing in an emerging market equity portfolio, the potential repercussions of the coronavirus crisis for globalisation, and our updated top-down country preferences. The appendix also includes updated valuation, performance, and volume data across the emerging equity markets.

The only change to our country ranking is Bangladesh; a change completely independent of risks relating to coronavirus, oil price, trade war or capital outflow from EM. We drop Bangladesh to the bottom of the list in Asia because of homegrown factors: the interference in the price discovery of the stock market and several poor, market-unfriendly, policy decisions (rate cap in banks, inflexible FX rate, ad hoc tax imposition in telecom, delayed regulatory price increases in pharma, ad hoc tax on the formal cigarette sector). All of this is spoiling the investment case positives (low-cost labour, low tariff access to the EU, urban population growth, dense urban population, infrastructure upgrade, low domestic political risk, geopolitical and investment support from both the India-centric and China camps).