Strategy Note /

Emerging-Frontier Equity Monthly - March: Roaring commodities meet rising rates

  • Iron up 31%, Wheat up 11%, Oil up 7%, US 10y up 52bps: worst mix for poor commodity-importers, eg Egypt, Pakistan, SL

  • Boon for commodity exporters in large EM (Brazil, Saudi, SA) and small EM (Chile, Colombia, GCC, Indonesia, Peru)

  • No Russia-Ukraine de-escalation: Germany still buys Russia gas, so hard for the 'West' to pressure China or India

Emerging-Frontier Equity Monthly - March: Roaring commodities meet rising rates
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
31 March 2022
Published byTellimer Research

At the market close on 30 March, MSCI DM was up 4% this month, FM was flat, and EM was down 2%. This compares with US Mega Tech up 9% and the GCC up 6%.

Russia-Ukraine, US Fed, Commodities, Covid

The madness and sadness of the Russia-Ukraine war continues. Negotiations offer the merest glimmer of hope for a pause in President Putin’s campaign but they are likely to remain fruitless, breaking down on foundational issues such as where to draw Ukraine’s border and what Ukrainian 'neutrality' means.

Russia (down 100%) remains off limits for foreign investors who are unable to sell, let alone repatriate capital, and has now been excluded from FTSE and MSCI EM indices. Markets with close economic ties were down significantly, eg Georgia (down 9%) and Kazakhstan (down 8%). The Russia collapse has also prompted an attempt to claim the moral high ground by those who market themselves as driven by ESG principles.

The US ban on Russian oil imports has been followed by its attempts to cajole the Europeans into following suit on all gas imports and imports, met by German warnings of the dire economic consequences of doing so, and to scare the Chinese into avoiding any form of financial or military assistance for Russia, met with an effective reaffirmation of China's commitment to its bilateral relations and criticism of 'Western' sanctions. The Tripolar World is being hastened by the Russia-Ukraine War.

US Federal Reserve Chair Powell has, meanwhile, been at pains to establish his hawkish credentials, at least rhetorically. The US 10-year bond yield is up 52bps (84bps ytd) to 2.32%. It is likely too early, in terms of fragile growth and ongoing supply disruptions, to call for a recessionary end to the commodity price strength. Before that turn, the reduction in risk appetite is negative and compounds the commodity price spike for almost all of EM.

Distress related to food and fuel inflation is visible in the commodity importers:

  • Egypt (down 13%) devaluing 14%, securing deposits and investment pledges from GCC allies, and re-engaging the IMF;

  • The reformist government in Pakistan (down 3%) undergoing a parliamentary vote of no confidence; and

  • Sri Lanka (down 43%, with 31% FX devaluation) enduring FX shortages and finally accepting the need for IMF assistance (and a likely restructuring of its external debt).

The silver lining in EM is visible only for the commodity net exporters:

  • Particularly, those with flexible exchange rates, which gives an additional level of gearing (on the up and downside) – Brazil (up 15%, with 8% FX rate appreciation) and South Africa (up 9%, with 6% FX rate appreciation);

  • Those with US dollar pegs benefited as well, of course, but to a lesser degree — Saudi (up 4%) and the GCC (eg Kuwait up 11% and Qatar up 7%); and

  • The longer-term beneficiaries of very high fossil fuel prices and the cheaper indirect plays remain, in our view, the copper exporters, Chile (up 10%) and Peru (up 12%), which are key for any accelerated transition to renewable energy prompted by those high fossil fuel prices.

While the barriers to Russians travelling abroad impact many tourist markets, news of reducing Covid restrictions – eg the UK dropping all entry requirements and Singapore softening some of its rules – should provide a fillip for the Easter and summer seasons.

Covid is still a long way off being snuffed out and China's zero-Covid strategy continues to prompt intermittent lockdowns, with the resulting local economic hit and global supply chain disruption, as exemplified, most recently, by the Tech Hardware hub of Shenzhen.

In the shadow of Russia-Ukraine, the US Fed, and Covid, the following developments in emerging markets are noteworthy over the past month.

  • China Tech (down 4%) recovered much of its early March decline on Chinese authorities’ statements that the stock market should be supported, news that China may allow US authorities access to audits in order to avoid de-listing of ADRs (albeit the US authorities stated any resolution was premature), and an expansion of Alibaba's share buyback.

  • India (up 4%) saw the ruling BJP dominate state elections, particularly in key Uttar Pradesh, which reduces 2024 general re-election risk, and might persuade Prime Minister Modi to restart reforms, although it reinforces the risks of illiberalism.

  • South Korea (flat) was helped by the election of the more market-friendly presidential candidate Yoon Suk-yeol, who favours deregulation (eg offshore FX trading and wider short-selling, which may ultimately help MSCI DM accession), although in the short term he will inherit pressure for more fiscal populism to address housing affordability and make youth unemployment (particularly given the opposition dominates parliament), and a sharp escalation in North Korea missile tests.

  • Colombia (up 13%) is heading for another classic LatAm electoral contest between left and right, with the resounding 80% victory for Gustavo Petro in his party’s primary to select their candidate for the May 2022 presidential election and his political pact's electoral gains in the highly fragmented legislature (16% and 18% of the lower and upper houses, respectively). Colombia remains relatively cheaper than most oil-exporter peers in EM.

  • Malaysia (flat) witnessed an unprecedented loss of a parliamentary vote by a ruling coalition. The National Front governing coalition, which was formed in August 2021, is dominated by Prime Minister Ismail Sabri UMNO (which is also the party of former Prime Minister Najib Razzak, convicted of corruption). It has merely 35% of the lower house of parliament. The vote defeat serves as a reminder of the fragility of any government until at least the next election (due before July 2023).

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

March performance and valuation of Emerging Markets

2) Technology: Rising rates headwind although a little hope from China's market-friendly rhetoric

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 particularly cheap in Mexico and Egypt in EM

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 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 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 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 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.

7) Recently published reports


Russia-Ukraine War: Glimmer of hope amid scepticism, seismic changes to last, 16 Mar


US, Europe, China: A Tripolar World hastened by the Russia-Ukraine War, 26 Mar

The Islamic Bloc: OIC a talking shop more than power base, but this could change, 23 Mar

Russian oil embargo, EM at $125 oil, 7 Mar

Food prices hit all-time peak after Russia-Ukraine spike, 4 Mar

US dollar still the dominant reserve currency – Russia sanctions confirm this, 2 Mar

The countries exposed to Russia's economic crisis, 2 Mar

Currencies at risk of devaluation based on alternative crypto data (Curran), 30Mar


When countries behave badly: The tortuous morality of ESG investing, 15 Mar


China's Shenzhen lockdown impact, 14 Mar

India: Reform and Illiberalism after Modi's BJP state elections success, 13 Mar

Why India abstained on the Russia vote at the UN, 3 Mar

Pakistan no-confidence vote: Last stand for the opposition, not Imran Khan, 21 Mar

South Korea's divided government, 10 Mar

Sri Lanka: IMF confirms our view on restructuring (Curran), 29 Mar

North Korea launches ICBM in major escalation (Culverhouse), 24 Mar


Turkish central bank stays course (Curran), 17 Mar

Ukraine: IFIs mobilise emergency funding (Culverhouse), 10 Mar


Colombia leftist shift (with Culverhouse), 14 Mar

Argentina: IMF approves programme (Culverhouse), 28 Mar

Venezuela: Hopes for sanctions relief fades as reality sets in (Culverhouse), 23 Mar

Middle East

MENA’s reliance on Russian/Ukrainian wheat imports (Curran), 25 Mar


Egypt: Currency devalued to combat rising external risks (with Curran), 22 Mar

Ghana's central bank does the heavy lifting, IMF ruled out (Culverhouse), 21 Mar

Higher oil prices spell big trouble for Nigeria (Omole), 9 Mar

South Africa: Rate hike preserves attractiveness of ZAR (Curran), 24 Mar

Tunisia inches closer to default (Curran), 31 Mar

Mozambique: IMF reaches staff-level agreement (Culverhouse), 29 Mar

Warning lights for inflation in Africa (Culverhouse), 9 Mar