Strategy Note /

Emerging-Frontier Equity Monthly – February: Putined

  • The expansive invasion of Ukraine has over-stretched Russia, triggered sanctions, and taken it off-limits

  • All emerging markets will suffer from lower global risk appetite, higher inflation, and stronger US$ for a while

  • But commodity exporters are ultimately much better protected from the fallout than the importers

Emerging-Frontier Equity Monthly – February: Putined
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
1 March 2022
Published byTellimer Research


In February, one issue has overshadowed all others: Russia's invasion of Ukraine.

I was certainly completely wrong to argue that there would be a limited incursion around the separatist areas. The approximately 25% fall in the Ruble and over 50% fall in MSCI Russia implies that I was not alone.

The over-reach of Russia, in extending its campaign beyond the separatist areas of Donetsk and Luhansk, has meant that a rapid, decisive victory is out of the question.

And the damage from the sanctions triggered, specifically those on Russia's central bank, has meant that the foreign reserve buffer which underpinned cheap currency and equity valuations has been rendered irrelevant with the imposition of currency trading and capital controls.

Autarky alone may not dethrone President Putin quickly, but a drawn-out 1980s Afghanistan-type conflict might over a longer time frame. Regardless, autarky puts paid to any foreign investment case in Russian assets.

The actual global repercussions are wide-ranging:

  • Commodity price spike, particularly in oil (up 11%) and coal (up 24%), but also soft commodities like wheat (up 24%), which favour exporters and obviously hurt importers.

  • Lower global risk appetite and stronger US dollar.

  • Portfolio and banking contagion from losses related to Russia positions.

  • Economic spillover to emerging markets reliant on remittances and tourists from Russia.

The potential medium and long-term repercussions in EM are also wide-ranging:

  • China's strategy on Taiwan will be shaped by how Russia-Ukraine plays out, even though there are material differences (eg Xi's domestic political challenges, China's reliance on manufacturing as opposed to fuel exports, the strategic value for the US in Taiwan's cutting-edge semiconductor manufacturing capacity and the Asian sea-based supply chain.

  • If China provides Russia a route to circumvent sanctions, then the segmentation of the global economy into segregated trading and financial blocs will accelerate and it will be harder for individual emerging markets to chart a neutral course.

  • Conventional military spend as a percentage of GDP is going to pick up, eating into resources for infrastructure, healthcare, and education upgrades.

  • If restriction from accessing its liquid foreign reserves and exclusion from SWIFT persists, then Russia may more rapidly adopt cryptocurrency transactions which, in turn, may trigger more vigilant supervision from the US and EU of cryptocurrencies.

Other developments in emerging markets pale into insignificance in comparison with those in Russia-Ukraine: e.g.

  • Brazil (up 5%) presidential front-runner leftist Lula's attempt to court the centrist electorate.

  • UAE (up 4%) introduction of 9% corporate tax.

  • South Africa (up 3%) improved fiscal deficit targets, albeit from commodity price-driven windfalls.

  • South Korea's (flat) tight race to the 9 March presidential election and North Korea's resumption of missile tests.

  • Turkey (down 2%) inflation up to almost 50%.

  • India (down 5%) expansionary fiscal and monetary policy.

  • China Tech's (down 13%) latest regulatory hit — fee reduction for Meituan-type delivery services.

  • Sri Lanka (down 16%) FX reserves plummet (again).

  • Iran Nuclear Deal renegotiations crept closer to the finishing line.

  • Credit Suisse data leak, which provided the latest insight into the links between corruption in emerging and developed markets for those ethical (ESG) investors who care to notice.

At the market close on 28 February, MSCI DM, EM, and FM were all down in the range of 3%, compared to DM ex-US tech down almost 5%, and GCC up 2%.

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: Rate hike reprieve hope

  3. Commodities valuation chart: Oil price rallying more than copper

  4. Tourism valuation chart: Covid threat receding

  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

February performance and valuation of Emerging Markets

2) Technology: Rate hike reprieve hope

Cheapest Tech in EM, ex-Russia, is in China and Small EM

3) Commodities: Oil price spikes again

Copper cheaper than Oil in EM hard commodity exporters

4) Tourism: Covid overhang receding

Tourism particularly cheap in Egypt and Georgia in EM

5) Performance and valuation summary

6) EM Equity strategy update: cheap tech, commodities, tourism, manufacturing and reform

The 2022 global backdrop is going to feature the following.

  • Higher oil and 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 Covid disruption (higher levels of vaccination and prior infection, prior deaths of the most vulnerable, less fatal variants, and intolerance of further lockdowns).

  • Flat to down US dollar (once the shock of Russia-Ukraine fades, as global growth normalises but US rates and yields slowly move up).

  • 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 slowly 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, 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 which 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 to 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 at least two markets that are cheap relative to history, Indonesia and, more so, Pakistan.

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 PM 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 bad policy markets: eg Argentina, Turkey, Sri Lanka, and 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, takes 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.

7) Recently published reports


Russia in ruins in 8 charts, 28 Feb

Russia's end game: Autarky if no de-escalation, 28 Feb

Russia escalates in Ukraine, boosts all EM commodity plays, 24 Feb


Military spend and conflict after Russia-Ukraine, 25 Feb

Global division on Covid, Climate, and now Russia, 17 Feb

Commodities back on top of Technology in EM after 2 years, 21 Feb

EM commodities hedge for developed market inflation angst, 15 Feb

Tech down but not out in emerging markets, 4 Feb

Food prices 10-year peak but decelerate 5th month in a row, 3 Feb

History lessons for EM assets as Fed starts to hike (Curran), 14 Feb


Corruption: Transparency International update, 1 Feb


South Africa 2022 Budget: The worst is in the rearview (Curran), 24 Feb

Nigeria: The song remains the same (with Curran), 3 Feb

Tunisia: IMF optimism may be premature (Curran), 16 Feb


China-Taiwan impact from Russia-Ukraine, 24 Feb

India's stimulus may not be sustainable, 10 Feb

Sri Lanka: Reserves plummet amid debt payment Ponzi (Curran), 7 Feb


Turkey: The calm before the storm (Curran), 17 Feb


Brazil: Much more to go for in EM's top performer, 18 Feb

Peru is ungovernable and Chile equities a cheaper copper play, 3 Feb

Middle East

Saudi: As good as it gets, 16 Feb

Iran Nuclear Deal: Are we there yet and will it even be worth it?, 21 Feb

UAE's new corporate tax and the goose that lays the golden egg, 31 Jan

Lebanon: First signs of life but outlook remains grim (Curran), 8 Feb