Strategy Note /

Emerging-Frontier Equity Monthly – November: Omicron jolt

  • Omicron Covid wave hits with vaccination higher (ex-Africa) but policy stimulus capacity and lockdown tolerance lower

  • Outperformers this month: Taiwan (Tech metaverse hope), Chile (rightist election lead), Dubai (privatisation hype)

  • Underperformers: Russia (oil, Ukraine), SA (Covid), Poland (inflation), Turk (rate cut), Pak (austerity), Arg (election)

Emerging-Frontier Equity Monthly – November: Omicron jolt
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
29 November 2021
Published by

Omicron jolt

Just as domestic lockdowns were receding and international travel was re-opening, the Omicron Covid variant hit, reversing performance across most equity markets in developed (DM), emerging (EM) and frontier (FM) markets, and across most commodities.

At the market open on 29 November, EM and FM, both down 3%, trailed DM, down 1%.

The global context for equities was characterised by:

  • Stronger US dollar (up 1.9% on the trade-weighted measure), weaker euro (down 2.5%), weaker average large EM FX (down 4.5%);

  • A drop in most hard, industrial, commodities (eg Oil down 10%, Copper down 1%), while soft, agricultural commodities were mixed (eg Urea up 14%, Wheat up 8%, Soybean up 2%, but Sugar down 1%, and Palm Oil down 2%);

  • Policy rate hikes in several EM countries (eg Hungary, Korea, Mexico, Pakistan, Poland, South Africa), with another glaring, exceptional rate cut in Turkey;

  • Geopolitical risk mainly focused on Russia troop mobilisation on the Ukraine border and the ongoing civil war in Ethiopia.

In Large EM, the highlights were as follows.

  • Korea-Taiwan Tech Hardware (up 2%) outperformed on hopes for a new tech cycle driven by metaverse (augmented reality) adoption.

  • Russia (down 14%, with FX rate down 6%) underperformed on concerns around escalation of tensions in Ukraine and the drop in oil prices.

  • South Africa (down 9%) also underperformed following its disclosure of Omicron Covid cases (full vaccination rate is merely 24%) and the resulting travel bans imposed by international hubs.

  • India (down 2%) weathered the setback to the reform story, with the plan to scrap agricultural reform (the Farmer Laws) and the precipitous drop of Paytm (down almost 20%, and at one point down 37%).

In Small EM and FM, the highlights were as follows.

  • Chile (up 10%) was the main outperformer, after rightist candidates collectively outscored leftist ones (by 53.5% to 46.5%) in the first round of the presidential election.

  • Dubai (up 5%) was driven by a local speculative surge (with value traded over 3x the past 5-year average) after plans to accelerate state-owned enterprise privatisations were announced (eg the main utility, toll road, and, potentially, parts of the Emirates Airline group), evident particularly in the share price of stock exchange operator DFM (up 137%).

  • Argentina (down 19%) reacted to the Peronist government's loss in the mid-term legislative elections, which potentially portends a period of internal party division, populist economic measures, a lame-duck period for any serious reform and an even rockier renegotiation with the IMF.

  • Poland (down 14%, with FX rate down 4%) underperformed over concerns that the policy rate is well behind the inflation curve. Despite rate hikes, the real interest rate is negative 5.6%.

  • Turkey (down 9%, with FX rate down 22%) continues to self-harm with another policy rate cut (100bps this month, which brings the cumulative cut since September to 400bps, and leaves the real interest rate at negative 4.9%) and another tirade against foreign portfolio managers by President Erdogan.

  • Pakistan (down 7%, with FX rate down 2%) raised the policy rate by 150bps to 8.75% (implying a real interest rate close to zero) and managed to get its IMF program back on track (albeit contingent on implementing central bank autonomy, hiking power tariffs, clearing the latest increment to power generation arrears, and raising fuel and general sales taxes) but the mainly locally driven investor base focused on the negative implications for near-term growth.

  • Kenya (down 8%) was dragged down by Safaricom (down 12%, 62% of the local index), which suffered from a bout of de-risking by mainstream emerging market funds (for most of whom, Safaricom is their sole Africa ex-South Africa position) more than from concern over the impact of the conflict in Ethiopia than for its operational launch or domestic regulatory risk.

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. Global context: Omicron amid higher inflation

  3. Technology chart: China Tech the cheapest

  4. Commodities chart: Copper is cheaper than Oil

  5. Tourism chart: The Philippines among the cheapest

  6. Performance, valuation, liquidity summary table: Equities, commodities, currencies

  7. Global EM equity strategy recap in 600 words, centred on the themes of Tech versus Commodities and Tourism, Locals versus Foreigners, Small versus Large EM, as well as updated charts on the Buffet Indicator and Dividend Yield versus Real Rates.

  8. Recent reports: Links to reports published this month on global EM and FM top-down issues.

1) The month in one chart

November performance and valuation of emerging markets

2) Global context: Omicron amid higher inflation

The new Covid variant, "Omicron", has sparked concern over how fast it might be transmitted, the protection from vaccines already administered as well as from prior infection, and the re-imposition of lockdowns and travel restrictions.

Brent crude oil price dropped nearly 12%, copper price dropped 3.9%, the S&P dropped 2.3%, the US 10-year bond yield dropped from 1.63% to 1.47%, and the MSCI EM index dropped 2.5% on 26 November.

The behaviour of markets to the initial Covid outbreak (globally) and to the emergence of the Delta variant (eg in India) suggests any sell-off is temporary.

However, should the Omicron outbreak proliferate, a repeat of this is contingent upon the US maintaining an easy monetary policy for longer than expected prior to Omicron.

This is a more ambitious assumption given the political sensitivity of higher inflation for the Biden administration in advance of the November 2022 mid-term elections.

The worst scenario for EM is the prevalence of Omicron everywhere globally except for the US, but this is highly unlikely given its highly contagious nature.

The precedents of the past 18 months or so are the following:

  • Tech companies whose products are adopted more rapidly in a lockdown environment and whose cashflows are longer-dated (ie whose valuation is more sensitive to changes in interest rate expectations) perform best initially.

  • Thereafter, demand for domestic consumption and commodities pick up first (eg oil, copper and other metals exporters in EM such as Russia, Saudi Arabia, South Africa and Brazil in large EM and Chile and Peru in small EM).

  • Followed by soft commodity exporters (eg Brazil in large EM and Indonesia and Malaysia in small EM) and manufacturing (eg Mexico, Vietnam and Bangladesh in small EM).

  • With tourism plays (eg Thailand in large EM and the Philippines, Dubai, Mauritius, Georgia, Croatia and Iceland in small EM) lagging behind all other segments.

Compared with earlier Covid waves, the Chinese portion of the tech universe has been damaged by the local regulatory crackdown, there is less doubt about the willingness of OPEC+ to limit supply in order to preserve price, and the election cycles in Chile and Peru have run or are close to running their course.

Where Covid – whether in its original mutation, Delta, or Omicron – has little relative bearing is in markets where economic policy lacks credibility (eg Argentina, Nigeria, Turkey, Sri Lanka, and, to a degree, Romania).

(i) Covid in EM

Compared with when the Delta variant surfaced early this year, the world, including large parts of EM ex-Africa, are much more vaccinated, have higher prior infection and have seen more of the most vulnerable segments of society perish.

This might imply less sensitivity in terms of healthcare impact, assuming that existing vaccines mitigate the effects of Omicron.

Covid vaccination and infection status in emerging markets

However, the starting point at the outset of Omicron is almost universally easing lockdown and travel restrictions. These likely go into reverse for a period of time, which is why markets have sold off so sharply.

As protests in Europe and Australia demonstrate, though, the more youthful segment of the population is not likely to accept another round of restrictions so readily.

Covid lockdowns scaled back in the last six months in EM

(ii) EM capacity for stimulus is limited should Omicron Covid disrupt

Compared with previous Covid waves, the capacity for policy stimulus response is generally lower, because of higher inflation and ongoing efforts to rein in fiscal budgets.

And it is not clear that remittances can continue to surprise on the upside and provide counter-cyclical ballast.

Real interest rates in emerging markets: few have the capacity to ease monetary policy comfortably

Fiscal balances in emerging markets: few have the capacity to ease fiscal policy comfortably

3) Technology: China cheapest

Cheapest Tech in EM is in China bellwethers

4) Commodities: Copper cheaper than Oil

Copper cheaper than Oil in EM hard commodity exporters

5) Tourism: Omicron threatens the recent re-rating

Tourism cheaper in Philippines, Egypt and Mauritius in EM

6) Performance and valuation summary

7) EM Equity strategy: Tech-Commodities-Tourism mix; the Reformers, Locals vs. Foreigners; Small over Large EM

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 as passive and active flows – we recommend, in large EM, a mix of exposure to Technology's secular growth (eg China Applications) to the stuttering post-Covid recovery in Commodities (Brazil, Russia, Saudi Arabia) 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), resilience (Qatar) and a mix of all of these factors (India).

So far this year, the pick-up in US yields, the stronger US dollar, the prospect of stronger fiscal stimulus in developed compared with emerging markets, US-China friction and further Covid-19 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 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.

  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 – such as LatAm trio Chile, Colombia, and Peru, and Tourist destinations like Thailand – and others at valuation discounts, like Egypt, Georgia, Mauritius and the Philippines — 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 and Pakistan.

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 c28% of MSCI EM), local investors are recognising these prospects, as reflected in the pick-up in trading activity.

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 six – Argentina, Lebanon, Zimbabwe and, to a lesser degree, Nigeria, Turkey and Sri Lanka.

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

Buffet indicator, relative to history, highlights small EM-FM

Local investor appetite for equities in EM

8) Recently published reports


Omicron Covid in emerging markets, 28 Nov

Remittances forecast raised by World Bank but there are downside risks, 18 Nov

The ultimate guide to the elections that will shape emerging markets in 2022, 16 Nov

Pfizer's Covid pill speeds up tourism recovery in emerging markets, 7 Nov

Food commodities rise to decade high, compounding fuel price for some, 4 Nov

Xi Jinping and key person risk in emerging markets, 12 Nov

Taper tantrum avoided, but sticky inflation may cause tantrum in 2022 (Curran), 22 Nov

EM central banks are staying ahead of inflation (Curran), 13 Nov

External Liquidity updated scores show risk of external crisis (Curran), 3 Nov

Paris Club update on DSSI and Common Framework, no surprises (Culverhouse), 4 Nov


ESG: Biden's Summit for Democracy and the challenge for ethical EM investors, 24 Nov 

Inequality a key issue for many, not China alone, 22 Nov 2021

ESG: Indonesia signals development over deforestation curbs, 4 Nov

EM green bonds: Love them or loathe them (Culverhouse), 30 Oct


China and US scramble for Africa, 27 Nov

South Africa follows the trend with a 25bps hike (Curran), 19 Nov

South Africa budget strikes right tone, delivery challenge (Curran), 12 Nov

Nigeria: Stealth devaluation possibly underway (Curran), 2 Nov

Ghana 2022 budget: Credibility gap (Culverhouse), 18 Nov

Cote d’Ivoire: Weathering the pandemic well (Culverhouse), 3 Nov


ASEAN abandoned in the foreign rush to China and India; revisit in 10 charts, 7 Nov

India: Modi repeals farmer laws, choosing re-election over reform, 19 Nov

Pakistan: Upgrade to Buy after positive IMF review and policy shift, 22 Nov (Curran)

Sri Lankan budget falls flat again (Curran), 15 Nov


Turkish lira implosion (Curran), 23 Nov

Romania's new schizophrenic coalition, 22 Nov

Ukraine: IMF finally approves (Culverhouse), 23 Nov


Brazil: Bolsonaro buys votes and alienates investors, 1 Nov

Chile presidential vote led by rightist candidates, 22 Nov

Argentina: Implications of the government's defeat in mid-term elections, 15 Nov

El Salvador: Bitcoin bond plan hits its US$ debt as IMF hopes die (Culverhouse), 24 Nov

Middle East

Kuwait government resigns, political reconciliation unlikely, 9 Nov

Iraq: Oil improves macro but underlying outlook still weak (Curran), 1 Nov


The Tellimer Emerging Markets Investability Matrix, available to full subscribers, contains over 160 equity and bond market, macroeconomic, consumer, manufacturing, ESG (governance and environmental), political risk, and Covid metrics across over 50 countries.