Strategy Note /

Emerging-Frontier Equity Monthly – May: US recession, food protectionism fears

  • Recession overtakes inflation as key US risk: might weaken US$ (helping EM) but commodities too (EM outperformers ytd)

  • Food inflation, protectionism, insecurity driving up protest and populist policy risk (loss of reform appetite) in EM

  • EM views: China over India (stimulus), Vietnam (resilience), Copper (Chile) over Oil (Saudi), Tourism (Thailand et al)

Emerging-Frontier Equity Monthly – May: US recession, food protectionism fears
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
30 May 2022
Published byTellimer Research

At the market close on 29 May, MSCI DM was up 0.5% this month, EM was down 2.8%, and less liquid FM was down 6.6%. This compares with US Mega Tech down 5%, after a down 15% month in April. The GCC gave back some of its ytd outperformance, down 11%.

US inflation fear to US recession fear

Four factors pulled almost all equity markets down this month in global DM and EM, despite a rally in the last trading week.

  1. Developed markets recession worries and US dollar strength.

  2. China growth concerns amid zero-Covid lockdowns.

  3. Food protectionism and the ever-higher food commodity prices it is driving.

  4. Tech application growth (post-Covid boost) and valuation concerns.

Compared to last month, consensus investor fears appear to have shifted from inflation (rising bond yields, rising equities and US dollar) to recession (falling bond yields, falling equities and US dollar), and the impulse for global food inflation has shifted from supply disruption resulting from the Russia-Ukraine War alone to protectionism in food trade.

Recession fear versus inflation fear in the US

US recession, China slowdown fear

The US 10-year treasury yield is 2.74%, well above the 1.51% seen at the start of the year, but down from an early May peak of 3.13%. The narrative around the US Fed has evolved from transitional inflation, to too far behind the curve, to tightening too aggressively as the economy slows.

A weaker US dollar is usually a positive for most of EM but, given how many of EM's ytd outperformers are commodity exporters (eg Brazil and Saudi in large EM, and eg Chile, GCC, Indonesia, Peru in small EM), a weakening US and global growth outlook could be a significant headwind (eg. Covid lockdowns in Shanghai and across China have put another dent in growth expectations).

Food protectionism

The Russia-Ukraine War grinds on with no sign of a negotiated settlement as Russia pursues slow and bloody territorial gains, ups the ante on EU gas exports (restricting supply to Poland and Bulgaria), finds Hungary an effective ally inside the EU, and is finding non-EU buyers for its oil (eg India).

Associated food supply chain disruption is already driving very high food inflation: the UN FAO Food index was up 30% yoy in April. albeit down 1% mom. However, that glimmer of hope that food inflation may have peaked is likely to extinguish soon as instances of protectionism in food trade increase. So far China (fertilizers), India (wheat, sugar), Indonesia (palm oil), and Malaysia (poultry) have applied restrictions on exports.

Snapchat, and generic tech risks

The US lead for the global tech sector valuation and performance has again been very weak this month (even the sharp rally in the final full trading week did not claw back all of the prior decline).

A downward revision from Snap (the parent company of online media app Snapchat) was blamed on a sudden slowdown in advertising, which, in turn, was attributed to a weaker macroeconomic backdrop.

Snap joined Meta (Facebook) and Twitter in cutting back both spending and hiring. Snap also fell over 40%, similar to Netflix in April. Both companies' disappointments have acted as a reminder of the risks in some tech business models to creating sustainable revenue (customer retention) and cash flow (continuous product development costs) amid greater competition and following the Covid-driven boost to adoption.

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

  • There are pockets of EM, Saudi 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, 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 c20% discounts to their respective 5-year median PE.


On the negative side, for example:

  • Russia-Ukraine can escalate economically (an 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 (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, 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.

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 and the rest of the GCC.

  4. Tourism valuation chart: Cheaper in Egypt, Philippines than Dubai, Thailand. 

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

  6. EM global equity strategy overview in under 1,000 words.

  7. EM Country scores updated.

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

1) The month in one chart

EM performance highlights this month

Large EM

  • Brazil (up 9%, with FX rate up 5%) outperformed by staying ahead of the inflation curve with another 100bp rate hike to 12.75%, implying a positive 0.6% real interest rate.

  • India (down 7%) underperformed, caught on the other side of the inflation curve and trying to correct for overly loose monetary policy, with worse than expected inflation (7.8% vs 7.45% consensus expectation) implying a negative 3.4% real interest rate. Concerns over the spending outlook by US corporates also drove down the Indian IT Services (down 9%, the worst-performing segment in EM tech).

  • Saudi (down 11%) was the worst performer in large EM, driven down by contagion from declines in global equity and crypto (eg Bitcoin down 24%), where most local Saudi high-net-worth retail investors have global portfolio exposure, and because Saudi (and others in the GCC, like Dubai) had outperformed substantially compared to global equity markets ytd. OPEC+ indication of maintenance of supply discipline drove another step up in oil price (up 9%).

Small EM

Chile (up 21%, with FX rate up 3%) and Mexico (up 8%, with FX rate up 4%) were similar to Brazil: policy rate hikes, of respectively, 125bp (to 8.25%, implying negative 2.3% real interest rate) and 50bp (to 7.0%, implying negative 0.7% real interest rate).

Philippines (up 1%) benefited from the orderly completion of its presidential election, with an overwhelming victory for opinion poll favourite Bongbong Marcos and the central bank's first policy rate increase (up 25bp to 3.0%) since April 2018, providing some reassurance that it will not leave its rate hikes too late (albeit real interest rate is still negative 2.7%).

Hungary (down 15%, with the FX rate down 2%) fell after PM Orban inaugurated his latest state of emergency with windfall taxes that ensnared the listed banking, oil, and telecom sectors.

Policy bête noires

Argentina (up 9%, despite 3.5% FX rate decline) benefited from continuing high commodity prices for its agricultural exports (c8% of GDP), hopes for policy correction after the end-March IMF agreement, and a 200bp policy rate hike (to 49%), which particularly drove the performance of the Banks. However, monetary policy is still too loose (negative real interest rate of negative 11%) and division with the Peronist government is already driving slippage in the commitment to subsidy reduction (witness the finance minister's comment on slower food subsidy withdrawal on 28 May).

Lebanon (up 44%) and Sri Lanka (up 15%) outperformed on (likely overblown) hopes that new political will has been found for the course correction decisions needed (after the parliamentary election in Lebanon and the change of prime minister in Sri Lanka).

Pakistan (down 12%, with FX rate down 7%) after violent protests and fruitless IMF talks (although the new government finally announced cuts to, at least, fuel subsidies), Turkey (down 10%, with FX rate down 8%, with no let-up in unorthodox interest rate policy), and Zimbabwe (down 28%, with FX rate down 45%, after a short-lived and ill-advised ban on bank lending) underperformed.

May performance and valuation of Emerging Markets

2) Technology: Bearing the brunt of fears of rising rates and recession

Cheapest Tech in EM is in China and Small EM

3) Commodities: Oil up slightly, Copper down slightly

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

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

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.

7) 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, 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 141 and 123 to 70 and 20, respectively.

Tellimer EM Country Index ranks emerging markets

8) Recently published reports


Food security in EM in the time of inflation, disruption, and now protectionism, 17 May

Food protectionism and inflation: India's wheat export ban the latest example, 16 May

Indonesia Palm Oil export ban compounds food inflation but the ban cannot last, 29 Apr

Food prices simmer, down 1% month on month in April but still up 74% from trough, 7 May


Misery in the emerging markets, 11 May

Wages in emerging markets: Competing with China's costs if not its scale, 2 May

EM equity valuation in front of the wall of worry, 9 May

Real interest rates in EM after the US Fed hike, 5 May

The 10%-ers: Number of high-yield sovereigns stands at series high (Culverhouse), 23 May

External Liquidity Index: Updating our scores as EM assets sell off (Curran), 12 May

Debt Sustainability Index: Our updated scores showing the risk of debt distress, 10 May

Three global themes from the IMF's Spring Meetings (Culverhouse), 7 May

EM yields hit 7% (Culverhouse), 10 May


Corruption in emerging and developed markets – an ESG investing blindspot, 22 May

ESG climate change risk in EM: Indian subcontinent heatwave reminder, 12 May

ESG: Press freedom black marks for largest EM and FM markets, China and Vietnam, 4 May


Biden talks Taiwan and IPEF but doesn't alter Asia security and trade outlook, 23 May

Bangladesh Taka is wobbling, but garment export growth de-risks it, 20 May

China equities foreign inflows resume, bucking large Asia EM trend, 11 May

India inflation shows its loose policy can't last, 13 May

Pakistan: Crackdown on protests and IMF talks futile, but value reflects crisis, 26 May

Philippines: Sins of the father not visited on the son as Marcos wins election, 10 May

Sri Lanka: Worsening political crisis will delay restructuring (with Curran), 11 May


Hungary: Windfall tax in Orban's state of emergency de-rates equities further, 26 May

Turkey: Full steam ahead into troubled waters (Curran), 12 May


Colombia: Leftist Gustavo Petro is favourite in two-horse race for presidency (with Culverhouse), 19 May

Peru's central bank hikes again but knives are out for Castillo (Culverhouse), 13 May

Middle East

Lebanon elections usher in fractured parliament (Curran), 24 May

Iraq must make hay while the sun shines (Curran), 6 May


Egypt reaches critical point amid rising risk of debt distress (Curran), 5 May

Kenya's sell-off has created a Buy opportunity (with Curran), 27 May

Nigerian central bank surprises with symbolic 150bps rate hike (Curran), 24 May

Nigeria: How to wake the sleeping giant? (Curran), 9 May

Commodity price boom masks South Africa's fundamental problems (Curran), 10 May

Angola's transformation is not just about high oil prices (Culverhouse), 13 May

Ethiopia: New forecasts are optimistic, but we stay cautious (Curran), 18 May