Strategy Note /

Emerging-Frontier Equity Monthly – April: Wall of Worry

  • Stagflation and $ strength, China Covid and supply chain disruption, Russia-Ukraine and food prices, Tech business risks

  • No room for mix of external vulnerability and poor policy but Sri Lanka (down 44%) an exception rather than a rule in EM

  • Saudi and GCC continue to outperform (oil exports, deep foreign reserves, currency pegs), but cheaper value elsewhere

Emerging-Frontier Equity Monthly – April: Wall of Worry
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
28 April 2022
Published byTellimer Research

At the market close on 27 April, MSCI DM was down 8% this month, EM was also down 8%, and less liquid FM was down 3%. This compares with US Mega Tech down 15% and the GCC up 3%.

Wall of Worry

Four factors pulled equity markets down this month, across the global DM and EM spectrum:

  1. Developed markets stagflation worries and US Dollar strength.

  2. China Covid lockdowns and supply chain disruption.

  3. Escalating Russia-Ukraine War and the ever-higher food commodity prices it is driving.

  4. Mega-Tech business model concerns.

US Dollar strength

Accelerating US inflation, and across developed markets, has reinforced the impression that the US Fed is behind the curve on rate hikes quantitative tightening.

The US 10-year treasury yield has increased from 2.35% to 2.80%, hitting a high of 2.97% on 20 April, compared to 1.95% at the start of the year. Long gone are the days of the transitional inflation narrative.

Meanwhile the US Dollar has moved higher again (trade-weighted Dollar up 3.4%, Euro down 4.5%, EM FX index down 2.9%).

China lockdowns

Covid lockdowns in Shanghai and across China have put another dent in growth expectations.

And corporate regulatory actions are mixed enough to suggest the crackdown has not ended, with some respite for video games companies but an anti-corruption investigation into the recently removed CEO of China Merchants Bank.

Indications of government stimulus, eg President Xi's urge to reinvigorate infrastructure investment, has arrested some of the decline in asset prices but not decisively so.

Russia-Ukraine and commodities

The Russia-Ukraine War grinds on with no sign of a negotiated settlement as Russia pursues slow and bloody territorial gains and has upped the ante on EU gas exports by suspending supply to Poland and Bulgaria (for failure to pay in Rubles, which would contravene EU sanctions on Russia's banks).

Food commodity prices continue to roar ahead, with the UN FAO Food index reaching an all-time high: up 13% mom in March (versus up 4% in Feb), up 34% yoy, and up 75% from May 2020 trough. However, crude oil prices moderated (down 4%) on China growth concerns.

With the exception of Saudi and the GCC, with their pegged currencies, the large commodity exporters in EM were overwhelmed by the currency weakness seen across EM (eg FX rate down 5.5% in Brazil and 8.5% in South Africa).

Netflix and Tesla, and generic tech risks

The US lead for the global tech sector valuation and performance has been very weak this month.

Worse than expected results from Netflix (down 49%) acted as a reminder of the risks on some tech business models to creating sustainable revenue (customer retention) and cash flow (continuous product development costs) amid greater competition.

The fall in Tesla (down 17%) was partly due to the perceived distraction ahead for its founder Elon Musk, in a reminder of the key person risk inherent in most relatively young tech companies.

Opportunity or harbinger of worse to come?

The key question is whether this weakness in EM equities is an opportunity or a harbinger of much worse to come? Obviously, we cannot answer that definitively.


On the positive side, for example:

  • The largest EM by far, China, has the rare capacity for stimulus.

  • There are pockets of EM, Saudi and the GCC, which 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, 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).


On the negative side, for example:

  • Russia-Ukraine can escalate economically (oil embargo from EU buyers, more gas supply suspensions from Russia), militarily (eg a spread to separatist parts of Georgia and Moldova, provocation on the Finland border), and geopolitically (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 out of place and self-defeating, and its property debt crisis has not been resolved.

  • Brazil, India and South Africa are not structurally reforming, with re-election the priority in all three.

  • 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).

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 launched this month, which also incorporates sanctions exposure, and longer-term ESG and climate risk factors.

Despite the decline in EM this month, 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 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: Rates headwind, China's market-friendly rhetoric

  3. Commodities valuation chart: Oil and Copper higher again

  4. Tourism valuation chart: Covid overhang receding but more Russians will stay at home now

  5. Global performance, valuation, liquidity summary table: equities, commodities, currencies

  6. EM global equity strategy overview in under a thousand words

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

1) The month in one chart

April performance and valuation of Emerging Markets

2) Technology: Hope in China video game approvals

Cheapest Tech in EM is in China and Small EM

3) Commodities: Oil and Copper higher again

Chile and Peru in Copper and Oman and Qatar in Oil & Gas are relatively cheap in EM hard commodity exporters

4) Tourism: Covid overhang receding but more Russians will stay at home now

Tourism cheaper in Egypt, Philippines than Dubai, Thailand

Russian tourists are big economic drivers in these countries

5) Performance and valuation summary

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

The 2022 global backdrop is featuring the following.

  • Higher oil and food commodity prices (as global growth 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).

  • 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.

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 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 ruling ANC party division, vested interests blocking structural reform, and chronic social inequality and youth unemployment.

    Russia and Saudi 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 is expensive 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 like Thailand in large EM, and others at attractive valuation versus history in small EM – such as Croatia, Egypt, Georgia, Greece, 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 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, Pakistan (with the Khan-led PTI government out of power) and the Philippines (with dynastic politics taking centre stage).

India and Kenya less appealing in 2022

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 impending state elections this year, particularly in Uttar Pradesh).

Kenya, in small EM, similarly offers exposure to some of these traits (particularly leap-frogging technology and tourism revival) but its largest stock, Safaricom, is at a premium to historic valuation, its banks are no longer at distressed valuation, the focus on the election this year continues to distract from structural reform and external liquidity is likely to come under pressure.

Off-limits markets: For example, 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 price or regional geopolitics, for trading volume and country index performance.

EM Country Index

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, Saudi Arabia and Vietnam are among the highest-ranked out of around 50 emerging equity markets in our new Tellimer EM Country Index.

Brazil, South Africa and Russia among large EM equities and Egypt, 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 145 and 143 to 76 and 45, respectively.

Tellimer EM Country Index ranks emerging markets

7) Recently published reports


Lack of EU-Russia gas sanctions makes it hard to corral India and others, 6 Apr


A new index for ranking the investability of emerging markets, 23 Apr

IMF's updated economic forecasts across emerging markets, 20 Apr

Only minor Q1 outflows despite the negative consensus on EM, 10 Apr

Food prices boil to new peak as Russia-Ukraine War bites, 8 Apr

US Treasuries near 3% (Culverhouse), 20 April

What rising US rates mean for EM assets (Curran), 6 Apr

Common Framework failings (Culverhouse), 20 Apr


Shanghai lockdown: China stimulus, Xi's third term, global supply chain, 11 Apr

Pakistan shows signs of progress on IMF programme (with Curran), 27 Apr

Pakistan: Imran is out as old parties prevail, for now, 10 Apr

Pakistan's early elections are positive for Imran's PTI, 3 Apr

Sri Lanka: IMF talks mark beginning of a long road (with Curran), 26 Apr

Sri Lanka announces external debt restructuring (Curran), 12 Apr

Sri Lanka: Market implications of political crisis (with Curran), 5 Apr

Sri Lanka's state of emergency could make things worse, 2 Apr


Turkey's electoral reform improves the prospects of ruling AKP, 7 Apr

Turkey: Entrenchment of low rates spells trouble for the lira (Curran), 14 Apr

Hungary: Orban's big win is unexpected and means more of the same, 4 Apr

Hungary: Orban's Fidesz favourite to win tightest election since 2006, 1 Apr

Impact of the Russia-Ukraine war on Eastern Europe (Culverhouse), 3 Apr


Argentina's IMF programme (Culverhouse), 4 Apr

Middle East

Kuwait government resigns yet again, 5 Apr

Lebanon: IMF agreement is a huge (but first) step (Curran), 8 Apr


Nigeria: 2023 election sets the tone (Ogunkoya), 27 Apr

Mauritius protests are a wake-up call for mainland Africa (Shah), 25 Apr

Ethiopia: The forgotten war rages on (Curran), 12 Apr

Tunisia inches closer to default (Curran), 31 Mar