Emerging-Frontier Equity Monthly – May: Commodity exporters, India, FM beat Tech

  • Dollar decline drives up markets linked to Euro (East Europe), Commodities (Brazil, Russia), risk appetite (FM)
  • Large EM: Commodity-fuelled Brazil, Russia, South Africa and "teflon" India outperform China-Korea-Taiwan Tech
  • Small EM-FM: diverse "Frontier" (Bangladesh, Georgia, Pakistan, Peru, Philippines, Vietnam) outperform Tech stocks
Emerging-Frontier Equity Monthly – May: Commodity exporters, India, FM beat Tech

Amid uncertainty over the pace and evenness of post-Covid recovery, over the sustainability of loose policy in developed markets without triggering high and lasting inflation, and over the increasing disconnection of the US and China, we continue to advocate a mix of Technology, Manufacturing, Commodity and Tourism exposure, screened for relatively cheap valuation, and, for those able to tolerate lower liquidity, the smaller over the larger emerging markets.

The tone for equities this month was set by the big miss on the US jobs report for April (226k increase versus consensus expectations of 1mn), supporting the risk-appetite of dovish investors on US inflation, who believe that rate hikes really are some time away. The next US jobs report is due on 4 June (consensus expectations are for 650k). The debate on the outlook for US inflation and yields is far from settled.

At the same time, the consensus view of Tech valuations appears to have turned less accommodating. A good quarterly results season for US Mega Tech (down 4%) has not prevented its underperformance versus Developed markets ex-Tech (up 1%).

Both the inflation and Tech valuation issues were brought into sharp focus after US Treasury Secretary Yellen's remarks, subsequently watered down, on the potential for rate hikes on 4 May and the subsequent convulsion in Tech share prices.

In large EM, Commodity-exporter skewed markets, Brazil, Russia, and South Africa (collectively 12% of MSCI EM and up 6-10%, with their FX rates up 3.5%) handsomely outperformed Tech-heavy China, Korea, and Taiwan (flat to down 3%). India (up 8%) also benefited from FX strength (up 2.2%) and hopes that its Covid crisis may be peaking.

Frontier and small Emerging markets (MSCI FEM and FM both up 4%) reflected a “risk-on” environment in the way that large EM used to before: 1) Tech (50% of MSCI EM) overtook Commodities and Financials (collectively 30% of MSCI EM) as the dominant sector; 2) the EM index became overwhelmingly concentrated in China-HK, Korea, and Taiwan (about 65% of MSCI EM); and 3) these three countries shed the traditional attributes of EM (high political risk and imprudent, pro-cyclical economic policy, particularly relative to the US).

The internationally-listed small EM and FM Tech stocks (down 4%) trailed a range of geographically and fundamentally diverse FM and small EM markets, eg manufacturing exporters Bangladesh and Vietnam, commodity exporters Kazakhstan and Pakistan, foreign capital flow plays Georgia and Dubai, slow-burning reform stories Pakistan and Philippines (up in a range of 6% to 32%).

Our monthly review of emerging (EM) and frontier (FM) equity markets is laid out as follows:

  1. The month's performance in Emerging and Frontier in one chart

  2. Global backdrop: Weaker Dollar, mixed Commodities, Crypto crash

  3. Technology EM: India Tech outperforms

  4. Non-Tech EM: Russia, Brazil, India outperform in large EM; Dubai and Vietnam among many outperformers in small EM-FM

  5. Performance, valuation, liquidity summary table: equities, commodities, currencies

  6. Global EM equity strategy recap in 600 words with downloadable slides, centred on the themes of: Tech versus Commodities and Tourism, and Locals versus Foreigners

  7. Recent reports: links to about 50 reports published this month on global EM and FM issues, ESG, Technology, and individual countries in every region.

1) May in Emerging and Frontier in one chart

May performance and valuation of Emerging Markets

2) Global backdrop: Weaker Dollar, mixed Commodities, Crypto crash

  • US treasury yields were flattish (down 8bps) and the US Dollar (trade-weighted measure) fell 2.9%, following the very weak US jobs report for April (226k versus 1mn expectation). On the flip side, the EM FX index, Euro and Chinese Renminbi were up 1.7%, 1.4%, and 1.8%, respectively.

  • Commodities were mixed. Copper (up 4% on continuing hopes of demand resulting from the Biden administration's infrastructure upgrade ambition in the US, offsetting concern over industrial action in BHP's Chile mines) and Oil (up 2% as optimism on demand and OPEC+ discipline, with the next meeting due on 1 June, offsets concern over the release of Iranian exports as the Nuclear Deal is resurrected) outperformed Iron Ore (down 5% after the Chinese government, wary of inflation pressure, applied pressure on local commodity traders to reduce long positions). A range of Food commodities softened, eg Palm Oil, Soybean, Sugar (down 2-4%), with Wheat (down 11%) the worst hit. The next UN FAO Food Price index is due on 3 June.

  • Cryptocurrencies Bitcoin (down 37%), Ethereum (down 12%) and Dogecoin (down 6%) underperformed Gold (up 8%).

3) Technology EM: India Tech outperforms

  • Large EM Tech – Global investor concerns over large cap Tech valuations hurt China Apps (down 5%) which were dragged down by weaker revenue and development cost guidance than expected from Alibaba (down 7%), and veiled political dissent from the CEO amid an ongoing domestic antitrust probe of Meituan Dianping (down 11%). Korea-Taiwan Hardware (down 2%) was hurt by a new round of Covid cases, a water shortage in Taiwan, and for Mediatek (down 19%) specifically, weakness in demand for some components from Chinese smartphone manufacturers Oppo, Vivo, and Xiaomi). India Tech, which is much less exposed to global risk appetite with merely 5% and 10% the daily trading value of China Apps or Korea-Taiwan Hardware, participated in the broad rally across equities in India, with India IT Services sector and Reliance Industries (both up 7%).

  • Small EM-FM Tech (down 4%) – The gap in the performance of the largest two internationally-listed stocks exposed to small EM and FM Tech is hard to explain: Sea (flat, after better than expected quarterly revenues across gaming and e-commerce, although EBITDA was worse than expected) substantially outperformed Mercado Libre (down 14%, despite better than expected revenues and EBITDA).

In EM, China and Russia Tech cheaper than US Mega Tech, but India, Korea, Taiwan, small EM-FM Tech more expensive

4) Non-Tech EM: Russia, Brazil, India outperform in large EM, Dubai and Vietnam among others in small EM and FM – we recap our views on each

Russia (up 10%)

The Biden-Putin US-Russia summit is scheduled for 16 June and it follows recent Blinken-Lavrov and Sullivan-Patrushev meetings at the foreign minister and security advisor levels, respectively.

Those two lower-level meetings did not give rise to the sort of public acrimony evident in Blinken's meeting with his Chinese counterparts in March. Perhaps geopolitical risk for Russia, or at least the capacity for geopolitical events to spook investors in Russia, may have peaked (although the Belarus hijacking does not help).

Russia equities look cheap relative to the MSCI Emerging Markets index and Commodity exporter peers. For example, Sberbank exhibits much lower price/book (1.2x) for much higher return on equity (19%) than almost all of the larger banks in Commodity exporter markets.

This has been the case during many periods over, at least, the past decade, as Russian equities have become ever smaller a weight in the MSCI EM index, but there are three Russia-specific drivers, in addition to what remains cheap valuation, why this may be a more opportune time to look at Russia than in the past:

  1. Commodity price tailwinds – Commodity exports equate to about 18% of GDP in Russia, compared to 7%, 15%, 28%, in Brazil, South Africa, Saudi, respectively. The Russian equity market is more skewed to commodities than these peers, with about 60% exposure compared to a range of 25-40%.

  2. Geopolitics probably cannot get worse and may be at a turning point – Fears over the actions (eg more severe sanctions) that might have been expected under a Biden administration that is committed (rhetorically at least) to a human rights-based foreign policy, have failed to materialise. This is despite the tests of the Navalny Affair or the Russian troop buildup around Crimea. In addition to this, Russia's demonstrable fiscal control in recent years has built a layer of protection against further financial sanctions. Russia remains an unquestionably inferior global military power to the US, but by showing its preparedness to deploy its military, it has created leverage in areas where the US has interests at stake, eg Eastern Europe and Turkey (Armenia-Azerbaijan, Syria, Libya, Eastern Mediterranean).

  3. Domestic politics remain in the iron grip of Putin and his circle of supporters – While the Covid crisis and the Navalny Affair have dented Putin’s popularity and, in the latter case, sparked mass protests, he likely remains unrivalled. His approval rating is 65%, his actions against dissidents and protestors demonstrate effective centralisation of power, and the constitutional change in 2020 creates a path to maintaining his grip on the Presidency until 2036.

Russia's Sberbank stands out in Commodity exporter Banks: lowest Price/Book for highest Return on Equity

Brazil (up 9%)

In Brazil, the last time that leftist Luiz Inacio Lula da Silva and centrist Fernando Henrique Cardoso shared a united cause it was in opposition to the military dictatorship of 1964 to 1985. On 21 May, they appear to have reunited in their opposition to incumbent far-right President Bolsonaro (who, incidentally, in 2019, reinstated the commemoration of the 1964 coup).

In response to the higher probability of a swing to the left at the October 2022 election (Lula was also leading opinion polls before his disqualification from the 2018 election), five factors argue against the sort of fears evident in LatAm peers (eg Chile, Colombia, Peru).

  1. Amid a chaotic response to Covid-19 and with re-election already on his mind, right-wing incumbent President Jair Bolsonaro has moved away from championing structural reform and liberalisation policies (undermining finance minister Guedes and interfering in the management of Petrobras).

  2. Congress is already highly fragmented and this would hinder even the most sincere reform efforts by the executive branch (there are over 25 parties in total and the largest party within the governing coalition has merely 8% and 15% of seats in the lower and upper houses, respectively).

  3. During Lula's tenure in 2003-10, the commodities super-cycle outweighed concerns over the socialist manifesto (if not all the policies and actions) of the Workers' Party he led.

  4. Commodities are once again a tailwind for Brazil, which could overwhelm poor politics: eg products related to soybean, iron and petroleum, each of which drive c15% of exports, and the prices of these commodities are up about 6%, 16%, and 30%, respectively, year to date.

  5. Brazil equities, measured by the Ibovespa Brasil Sao Paulo Stock Exchange Index, are now up 5% ytd in US$ total return terms. This is flattered by the performance of the largest constituent, Iron Ore exporter Vale, which is about 12% of Ibov and 20% of MSCI Brazil. Vale is up about 35%. A weighted average of the two largest Banks (Itau and Bradesco, which account for about 12% of the index) is closer to flat. Forward PE of the index is 10.3x, a 20% discount to the five-year median – the largest discount in large EM excluding South Africa – and even Vale, with a PE of 5.2x, is on a 22% discount.

Lula politically resurrected and leads Bolsonaro in polls

India (up 8%)

Daily new Covid cases are running 20% higher than a month ago and 20x higher than at the start of the year. If we assume that a governing coalition led by the BJP offers the best prospect of structural economic reform, the electoral appeal of India's ruling BJP is highly dependent on the image of Prime Minister Modi, and the Covid-19 catastrophe hurts both economic recovery and somewhat tarnishes that image, then the two key questions for investors in Indian equities are the impact on Modi's electoral appeal and the sensitivity of valuation to earnings downgrades.

  1. Does the hit to Modi's popularity raise the probability of BJP losses in state elections in 2022 and the general election in 2024?

    The progress of Covid-19 in India will no doubt have a bearing on the state elections in 2022, eg in the key state of Uttar Pradesh. However, to extrapolate a potential stumble by the BJP in those elections to its prospects in the national elections is not merited: India does not have the bipartisan politics of the US or the bipolar politics of Brazil where, at the national level, two equally organised camps usually compete head-to-head.

    In India the decline of the Congress party, with merely 10% and 15% of the lower and upper houses of parliament, mean that, at the national level, it will be a contest between the BJP, albeit a potentially wounded one, and a highly fragmented opposition with no nationally unifying, charismatic leader.

    Furthermore, with those national elections about two years away there is a lot of time left for the BJP government to do a better job on Covid-19, or at least to market the message to its own supporters that the blame for the healthcare crisis lay with the opposition politicians running the state governments out of its control, and to take credit for an economic rebound.

  2. What is the sensitivity of Indian equity valuation to downside scenarios for GDP and corporate earnings growth?

    Consider what the forward PE multiple (versus the five-year median) would look like with less optimistic aggregate earnings growth forecasts.

    Current published expectations imply a very sharp bounce-back this year: 12% real GDP growth and 17% nominal GDP growth, according to the IMF, and 37% aggregate Sensex corporate earnings growth.

    Obviously, these are at risk (the IMF has acknowledged as much). The fiscal deficit in 2021, forecast at 10% of GDP by the IMF, will clearly take a hit. While this means more crowding out of private sector credit, with total government debt/GDP of c90%, the absence of significant short-term external debt (to GDP, the ratio is merely 5%) and a healthy buffer of foreign reserves (15 months of import cover) should make for low risk to the FX rate.

    If Sensex consensus earnings growth is cut from c40% in 2021 to 10% then forward PE goes from 22x to 28x, a 40% premium to the 5-year median. A cut to -10% (ie a repeat of 2020) would imply a PE of 34x, a 70% premium). Given the non-recurring nature of this episode, these stress tests on valuation of the index look relatively comforting (assuming there is the balance sheet strength at the individual corporate level to cope with the temporary hit to the operating outlook).

India forecasts for 2021 (12% real GDP and 40% corporate EPS growth) obviously at risk of being cut

Dubai (up 8%)

Dubai has liberalised its visa regime, falls under the UAE's Abraham Accords with Israel, has maintained a globally rare sense of normality during Covid in terms of outdoor activities and open schools, and is efficiently vaccinating its population.

And, perhaps most importantly, Dubai now has cost of living over 20% below Hong Kong and Singapore. The main driver of this competitiveness is residential property prices which, since the start of 2015, are up 35% in Hong Kong, flat in Singapore, and down 30% in Dubai.

For global emerging market equity investors, there is one stock alone which is liquid enough to provide exposure: Emaar Properties, which has about US$12mn of ADV and is on 0.5x trailing price/book (a 36% discount to the 5-year median).

For a new expatriate resident property prices have moved in Dubai's favour compared to Hong Kong and Singapore

Vietnam (up 7%)

The Vietnam investment case has pretty much everything apart from democracy and press freedom for those driven by sovereign ESG: manufacturing exports, US and EU trade access, urban density-job creation-consumption, infrastructure upgrade, remittances, tourism (including domestic tourism), US geopolitical support. It has been our top strategy pick for many years now.

The investment risks are the invisible power struggles within the Communist party, the ageing population (median age has troughed at lower GDP per capita than successful Asian development stories), and the loss of momentum behind economic liberalisation (privatisation, foreign ownership limit increases).

However, the key problems with translating this top-down nirvana into an equity strategy all stem from low free floats and low foreign ownership limits – we estimate merely 22% of MSCI Vietnam is accessible for fresh capital from foreign investors.

  1. Highly restrictive foreign ownership limits mean that mainstream EM funds cannot allocate meaningfully sized capital (this inhibits the avalanche of foreign capital inflow should Vietnam capture the attention of those funds).

  2. The best quality stocks (which are not owned or closely related to the government, have relatively open disclosure, in terms of transparency of business model and ownership, and a track record for execution of stated strategy) are often already at foreign ownership limit and do not get handed to the marginal portfolio buyer to take their share price higher (those foreign funds lucky enough to have got in before the foreign ownership limit was reached often simply sit on their positions unless there is a redemption of their fund).

  3. When foreign institutional investors build sizeable stakes in locally-listed companies they run an even greater risk than normal of being front-run both because the process of securing sufficient stock can be lengthy, there is no competition from an entirely foreign broker managed transaction (local brokers must be used) and negotiated premia to secure a block of stock from an existing foreign holder within the overall foreign ownership limit can extend to tens of percentage points (implying a negative hit to a fund's net asset value from day one).

The upshot of this foreign ownership limit problem is to reduce a high conviction country view into a rather watered-down and unsatisfactory equity strategy view to merely hold on to existing holdings in the better quality companies and to wait for new listings at the right price.

5) Performance and valuation summary

6) Equity strategy: Tech vs Commodities and Tourism; the Reformers, Locals vs Foreigners

A slide presentation that summarises this strategy view is available via this link.

Download .pdf
Amid so much uncertainty on the biggest macro factors affecting emerging markets (EM) – the Covid pandemic, US rates and inflation, the balance of local and foreign as well passive and active flows – we recommend, in large EM, a tilt from exposure to Technology's secular growth (China, Korea, Taiwan) to the stuttering post-Covid recovery in Commodities (Brazil, Russia, Saudi) and Tourism (Thailand).

Small EM-FM is generally cheaper (apart from the Technology sector, where scarce listings attract a premium) than large EM. And it is locals, driven by low interest rates, that are the catalyst for a re-rating. In contrast, foreigners are too restricted by mainstream benchmark indices or too small, if they are the heroic survivors in the dedicated small EM-FM asset class, to drive their markets as they once did on their own. This does not stop them benefiting from better performance driven by locals.

For those able to think long term – through Covid-19 disruption, on the one hand, and through the liquidity demands of periodic redemptions along the way, on the other – we stick to many of the long-term factors we have discussed before to determine our top picks, such as secular Tech growth (cheaper in EM than DM), macro growth (Vietnam, Bangladesh), reform (Indonesia, Pakistan, Philippines), resilience (Qatar) and a mix of all of these factors (India).

So far this year, the pick up in US yields, the slightly stronger US Dollar (at times), the prospect of stronger fiscal stimulus in developed compared to emerging markets, US-China friction, and Covid-19 second waves have hurt the relative performance of emerging market equities in general. But this has also made for more compellingly valued opportunities across a range of themes:

  1. China Technology (particularly Alibaba and Tencent), is amongst the cheapest and most liquid exposure to structural growth, which has benefited, of course, from Covid-19 disruption but will outlast it.

  2. Alternative manufacturing locations to China that are able to benefit from US-China friction – such as Bangladesh and Vietnam – still have positive macroeconomic transformation ahead.

  3. Commodity exporters, particularly those not at significant valuation premia versus history, like LatAm trio Chile, Colombia, and Peru, and Tourist destinations like Thailand and others at deep valuation discounts, like Dubai, Georgia, Philippines, and Sri Lanka, offer recovery opportunities, for those prepared to look beyond Covid disruption.

  4. Homegrown structural reform continues, despite the Covid shock and domestic political challenges, in markets like Indonesia, Pakistan and Philippines.

Buffet indicator, relative to history, highlights FEM

Regardless of the foreign flows into international equity funds and the increasingly absurd misrepresentation of EM countries by benchmark index providers (eg South Korea and Taiwan have per capita incomes closer to Italy than most truly EM countries but make up 27% of MSCI EM), local investors are recognising these prospects, as reflected in the pick up in trading activity.

Locals: Forward dividend yield minus real interest rate

Out of the 50 EM and FM countries we look at, the instances where policy on interest rates, fiscal spend, FX regime, or banking supervision are so poor that they fatally undermine the investment case in locally-listed equities, for most foreign funds, is limited to perhaps four (Argentina, Lebanon, Nigeria, and Zimbabwe).

Ironically, Turkey, between November 2020 and March 2021, is the most recent example of how quickly and how much those funds can reward, from a low base, a return to better policy and how, as long as capital controls are not imposed, those funds can price the risk of poor policy (ie they remain engaged).

7) Recently published reports

Global Economics and Equity Strategy

Remittances forecast raised again by World Bank, 14 May 

Emerging market strategy and valuation amid inflation and Covid wobble, 12 May

Remittances are still helping many emerging markets, but Nigeria is an outlier, 9 May

US Dollar's reserve currency status is fading, but it's still dominant, 6 May

EM Tech valuation screen after Yellen's slip highlights Alibaba, Mercado Libre, 5 May

IMF implied FX forecasts may be a signal of misalignment (Curran), 28 May

Foreign ownership of EM local government debt signals capital outflow risk (Curran), 19 May

Tellimer's External Liquidity Scorecard (Curran), 10 May

Debt sustainability index: Our updated scores showing the risk of debt distress (Curran), 28 April

EM sovereign bond issuance picks up as Taper Tantrum risks subside (Culverhouse), 4 May

MMT-driven inflows are still coming to an Emerging Market near you (Domjan), 8 May


Military spend is immune from Covid, 18 May

International Energy Agency calls time on Oil, 20 May


Sea Ltd: Set to sweep through ASEAN (Tiruchelvam), 19 May

Gojek and Tokopedia's US$18bn merger creates an Indonesian Tech giant (Tiruchelvam), 17 May

Regulators are striving to turn back the cryptocurrency tide (Shah), 21 May

Waterdrop’s post-IPO collapse highlights Chinese fintechs' regulatory woes (Shah), 13 May

7 upcoming Emerging Market fintech IPOs worth waiting for (Kumar), 11 May

Vietnam ranks first on our Fintech Financial Inclusion Scorecard (Shah), 11 May

10 listed EM names writing the fast-growing payments infrastructure story (Kumar), 7 May

How technology can boost financial inclusion and which markets will benefit (Shah), 1 May

Block-washing or building blocks? Blockchain’s impact will be biggest in EM (Domjan), 29 May


India PM Modi's setback in West Bengal is far from a fatal blow, 3 May

Teflon Modi, 18 May

Bin Laden killed in Pakistan 10 years ago: The positive change since, in 1 chart, 2 May

Pakistan political storm in a teacup (again), 19 May

Philippines: Walking the tightrope between US and China in the South China Sea, 4 May

Sri Lanka: Debt reclassification causes confusion (Curran), 12 May


South African Reserve Bank holds rates; bias towards stable rates in 2021 (Curran), 20 May

Morocco marijuana: Legalising a growth sector, 27 May

Nigeria: Boko Haram leader may be dead, 21 May

Central Bank of Nigeria makes dovish shift and affirms FX unification (Curran), 25 May

Nigeria: Another meaningless naira devaluation (Curran), 18 May

Kenya constitutional reform builds and burns bridges, 7 May

Kenya: First IMF review points to positive reform momentum (Curran), 20 May

Kenya: Safaricom in Ethiopia: Not as lucrative as the market believes (Omole), 30 May

Ethiopia: Sanctions exacerbate financing constraints (Curran), 25 May

Sudan remains on track to receive HIPC debt relief (Culverhouse), 18 May


Russia revisited as Biden-Putin summit confirmed, 26 May

Belarus hijack shock: Initial thoughts and implications, 24 May

Turkey: Central bank holds again, but easing bias still clear (Curran), 6 May

Turkey: Another leadership shuffle at the central bank (Curran), 26 May

Ukraine GDP warrants: First payment is confirmed (Culverhouse), 21 May

Iceland surprises with a rate hike (Culverhouse), 19 May


Democracy disappoints in LatAm, 16 May

Bolsonaro unites Brazil opposition, 23 May

Argentina: Investors look for scraps from IMF and Paris Club (Culverhouse), 17 May

Chile votes left, 17 May

Commodity food prices scorch higher in April, 6 May

Colombia underperforming oil peers and cheap but struggles to reform: 7 charts, 4 May

Covid scenarios for LatAm & the Caribbean and their wider lessons (Domjan), 22 May

Middle East

Dubai can lure Hong Kong expats, 17 May

Israel risks “Civil War” as conflict escalates and Netanyahu faces Case 3000 (Domjan), 15 May

Most Viewed See latest

This report is independent investment research as contemplated by COBS 12.2 of the FCA Handbook and is a research recommendation under COBS 12.4 of the FCA Handbook. Where it is not technically a res...

Full Tellimer disclaimers