Strategy Note /

Emerging-Frontier Equity Monthly – July: Growth, debt fears but Fed less hawkish

  • Commodities down (growth fears), stressed parts of EM in the grip of external debt fear, but US Fed a bit less hawkish

  • China stutters (off-plan property boycotts, lingering Covid, Didi penalty, Yaqing probe), EU energy crisis infects Euro

  • EM views: China over India (stimulus), Vietnam (manufacturing), Copper (Chile) over Oil (Saudi), Tourism (eg Thailand)

Emerging-Frontier Equity Monthly – July: Growth, debt fears but Fed less hawkish
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
1 August 2022
Published byTellimer Research

At the close of 31 July, MSCI DM was up 8% month to date, while EM fared much worse at down 0.2%, and less liquid FM was up 1% (FM ex-GCC was flat). This compares with US Mega Tech up 19% after three months of decline.

As always, there was a wide dispersion in Large EM — India (up 9%) versus China (down 9%) — and Small EM — eg Kenya (up 17%) versus Pakistan (down 17%). Passive index trackers take note!

The US Dollar (trade-weighted) strengthened 0.8% (up 6% ytd), the Euro declined 2.5% (down 10% ytd), and the EM FX index declined 2.4% (down 4% ytd).

Hard commodities were down amid continuing fears of recession, with Brent down 10%, Iron Ore down 5%, and Copper down 4%. Oil derivatives fared better, with Urea up 20% and Ethylene up 2%.

Soft commodities were also down sharply, eg Sugar down 14%, Palm Oil down 14%, Wheat down 7%, and Soybean down 3%.

Fear turns to hope in the US, vice-versa in China

Fears on global inflation and recession, US Dollar strength, and emerging markets external debt still dominate global equity markets.

However, comments by the US Fed that "We are at levels broadly in line with our estimates of neutral interest rates, and after front-end loading our hiking cycle until now we will be much more data dependent going forward" reinvigorated risk appetite at the end of the month.

With the latest inflation print of 9.1% and policy rate now 2.5%, the real interest rate in the US remains deeply negative, at 6.6%.

Arguably, there is some way to go to put the US inflation genie, and the policy rate hikes which hit growth, back in the bottle. But for now, the consensus of investors appears to embed hope that the worst is over.

Stagflation and recession fear to hope the worst over in US

In contrast to the US, sentiment on China took a turn for the worse, with:

  • Off-plan property payment boycotts and the absence, so far, of a large enough policy stimulus bazooka to address the property debt crisis (eg plans for a real estate fund of up to US$44bn compares with S&P worst case scenario estimate of US$350bn of at-risk mortgages).

  • Lingering Covid lockdowns (eg Wuhan).

  • Financial penalty on Didi.

  • Discipline probe on industry and information technology minister Xiao Yaqing).

  • Purchasing managers index for manufacturing deteriorating back to contractionary territory, from 50.2 to 49.0.

China economic activity slips again

EM 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?


On the positive side, for example:

  • 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.


On the negative side, for example:

  • 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 and 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 launched last month, 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

July performance and valuation of Emerging Markets

2) Technology: Less hawkish US Fed outlook at boon 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), Oman, Qatar (Oil & Gas), Brazil (Iron, Food)

4) Tourism: Post-Covid recovery, excluding Russians

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

Russian tourists are big economic drivers in these countries

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

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

6) Performance and valuation summary

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

The 2022 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 like 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, Pakistan (with the Khan-led PTI government out of power) and the Philippines (with dynastic politics taking centre stage).

India less appealing in 2022, 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 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 the focus on the election this year continues to distract from structural reform and external liquidity is likely to come under pressure. But 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-limits 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


Misery in emerging markets: Is Sri Lanka the protest canary in the EM coal mine?

Emerging market currency valuation amid US dollar strength

Recession fixation is not reflected in forecasts and won’t impact rates yet (Curran)

US falls into technical recession (Culverhouse)

The countries most vulnerable to tight global financial conditions (Curran)

Biden's Middle East trip likely won't push oil prices down

Food prices cool, down 0.6% mom in June, still up 70% from trough

Expats in emerging markets: Cheap and attractive locations

Tourism in emerging markets: Cheap holidays for investors


Abortion rights in Emerging Markets and what it means for ESG


Thailand: Shinawatra scion tops opinion poll, election likely before May 2023

Pakistan: IMF staff-level agreement may help avert crisis (with Curran)

Sri Lanka's presidential appointment is unlikely to placate protestors (Curran)


Kazakhstan votes to end Nazarbayev-style rule; adds reform to commodity tailwind

Ukraine seeks to postpone eurobond payments (Culverhouse)


Copper's fall should not put off a revisit of Chile and Peru equities

Argentina: Sergio Massa appointed new economy minister (Culverhouse)

Argentina: Guzman's resignation points to challenges ahead (Culverhouse)

Colombia turns left (with Culverhouse)

Middle East

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

Dubai is back! But global headwinds a serious concern


Egypt priced for distress: Too harsh but don't expect the army to drive reform

Kenya: IMF review boosts bonds but raises red flags on external accounts (with Curran)

Nigerian central bank surprises with another rate hike (Curran)

Nigeria ejection from MSCI FM looms

Ghana inflates fiscal deficit away (Culverhouse)