Emerging-Frontier Equity Monthly, September: EM Tech and FM outperform

  • Anomalies: EM Tech hardware up but FANG down, GCC strength vs oil peers, Indonesia's weakness on Covid-19 vs Asia peers
  • Frontier outperforms, but due to final slew of inflows to Kuwait before its November upgrade to the Emerging index ...
  • ... and illiquidity (low traded value) in FM both on absolute basis and relative to 5-year history vs China, EM, or FANG
Emerging-Frontier Equity Monthly, September: EM Tech and FM outperform

September in Emerging-Frontier

Global backdrop

In September, the global backdrop featured the following:

  • US$ (trade-weighted) appreciated 1.4% (although still down 2.6% qtd), while the index of the largest EM FX rates fell 1.3%;

  • FANG+ (mainly US mega cap Tech) dropped 10% (although still up c25% qtd and over 60% ytd);

  • VIX (volatility index) up 8% (but still 70% below March peak);

  • Oil, copper, and iron ore down 7%, 2%, and 2%, respectively, (OPEC next meets on 30 November), and one of the largest oil majors, BP, following a halving of its dividend in August, communicated its strategy to shift its mix from oil and gas to renewables;

  • Remittances back to small EM-FM continue to track better than feared (with a range of 12% decline to 15% growth in a sample of remittance-dependent countries, although whether this is flattered by a shift to official channels, Eid timing, and final remits after job losses remains is unclear – see Remittances: Better than feared so far (Sep 2020);

  • Joe Biden, Democrat candidate, remains most likely to win the electoral college in the November US presidential election (with 85% probability, down a little from the late-August peak of 89%, according to the predictive model of The Economist);

  • US-China friction was on full display in the speeches of Presidents Trump and Xi at the UN General Assembly (Biden followed up with remarks in line with the current bipartisan hawkish consensus, where his differentiation with Trump remains a multilateral, rather than unilateral, approach to dealing with China);

  • Covid-19 continues to oscillate between a source of gloom (new waves of infections even in those countries previously successful in their control of it, lasting economic damage to traditional businesses) and one of optimism (partial control of infections, progress on vaccines, penetration gains for online businesses).

Large EM

MSCI EM (down 4%) weakness was across many of the large markets which dominate the index (China, India, Brazil, Russia, South Africa). The outperforming exceptions were some of the Tech Hardware stocks in Taiwan-Korea. Russia (down 7%, with 4% FX depreciation) underperformed alongside the fall in oil (down 7%).

The EM Tech index (up 2%) was led by Samsung Electronics (phones, electronics, displays, semiconductors) and Hynix (DRAM) in South Korea, and Mediatek (fabless system on chip) in Taiwan. This was driven by a combination of high reported monthly sales growth (eg over 40% yoy in August for Mediatek), optimism on new product cycles (5G mobile, Artificial Intelligence, Internet of Things), and a reversal of some of the previous month's underperformance versus China's application-centric Tech sector.

EM Tech outperformed the FANG+ index (down 10%), made up of the largest US Tech hardware, software and application stocks. This is the first monthly decline in FANG+ since February 2020 (when there was also a 10% drop but from a much lower level, with FANG+ increasing 90% in the five months spanning April to August).

Current forward PE and forward EV/EBITDA relative to the median value seen since the start of 2019 (from when consensus estimate data is available across the three indices) suggests that within large Tech globally, that valuations relative to history are cheapest in Taiwan-Korea Tech Hardware, followed by US Tech Mega Cap, and lastly, in China Tech Apps (which make up most of the MSCI China Consumer Discretionary index).

See Technology stocks cheaper in Taiwan-Korea vs US or China, let alone small EM-FM (Sep 2020).

Small EM-FM

FM outperformance (for the wrong reasons)

FM (up 2%) outperformed but due to the final slew of inflows to Kuwait (up 6%) before its November upgrade to the EM index and low liquidity (low traded value) both on an absolute basis and relative to 5-year history compared to China, EM, or FANG+.

  • In Kuwait, average daily value (ADV) traded in the last month was 60% higher compared to the average of the past five years, whereas it was merely in line for FM ex-GCC, and 40% below for Africa ex-SA.

  • ADV in China, EM, and FANG+ was, respectively, 280%, 150%, and 130% higher than the average of the past five years.

Internationally-listed small EM Technology

Most of the internationally-listed small EM Tech stocks fell in line with FANG+, eg MercadoLibre (down 12%), although Sea continues to outperform.

The other two largest Tech stocks in small EM-FM with positive earnings and EBITDA, Mercadolibre and Yandex, look more expensive than large-cap Tech in Taiwan-Korea, the US, or China, on the basis of forward PE and EV/EBITDA relative to medians since the start of 2019.

This gives an indication of how much of a premium investors in small EM-FM are having to pay for such scarce exposure to liquidly traded Tech.

See: Disruptive Technology and low FX controls risk in small EM via overseas listings (Apr 2020)


The main underperformers were Indonesia (down 11%), dragged down by unrelenting Covid-19 infections and resulting lockdowns, and Thailand (down 9%), driven by ongoing protests against delayed and incomplete constitutional reform, Covid-19 disruption to tourism, and the ongoing tension within the ruling coalition parties for the vacant finance minister position. Malaysia (down 3%), on claims by opposition leader Anwar Ibrahim that he now commands a majority, was also weak.

Indonesia equities, measured by the MSCI Indonesia index, are down almost 30% ytd, with weakness across most sectors. This makes it the worst-performing market in the Asia peer group (although MSCI Thailand is close), even if we exclude tech-heavy China, Taiwan, and Korea. Trailing price/book is 2.0x (14% trailing ROE), a 25% discount to the 5-year median, and trailing price/earnings is 14.5x, a 15% discount. No other Asian market is as cheap relative to history on the combination of these metrics.

  • New Covid-19 infections have averaged over 4,059 daily over the third week of September, over double the average seen in August or July. The failure to slow the Covid-19 infection curve is critical; the renewal of lockdown measures on 14 September clearly means another hit to consumption and related banking and real estate, and further strain on fiscal spend to compensate. Indonesia is a relatively domestically-driven economy. Exports to GDP of 20% over the 2015-19 period is similar to Bangladesh, India, and Sri Lanka in South Asia, but far below the range of 28-100% seen in Malaysia, Philippines, Thailand and Vietnam in ASEAN.

  • On 22 September, Finance Minister Indrawati publicly downgraded real GDP growth expectations for 2020 from a range of -1.1% to +0.2%, to a range of -1.7% to -0.6%. Nonetheless, Covid-19, as a continuing global drag, is arguably at least as damaging for Asian peers much more reliant on manufacturing exports, tourism, and overseas remittances.

  • The structural investment thesis in Indonesia is largely unchanged (the positives are large and youthful population, manufacturing potential, low FX vulnerability, and the weaknesses are patronage constrains reform, commodity dependence), but it has become much cheaper.

See Indonesia: Among Asia's cheapest equities after recent 10% fall (Sep 2020), Thailand: A long road for constitution amendments (CGDCIMB, Sep 2020), and Malaysia: Fragile government in peril but no guarantee of a stronger one instead (Sep 2020).


Nigeria (up 5%) outperformed after a surprise policy rate cut (by 100bps to 11.5%, the second cut this year and the lowest rate since 2016) spurred hopes of some for faster growth (real GDP declined 6% yoy in Q2, roughly evenly spread across oil and non-oil sectors). For foreign institutional investors, FX restrictions make all of this irrelevant with capital still trapped.

Absent a substantial increase in oil prices, Nigeria is likely to struggle to stimulate faster growth though policy rate cuts alone:

  • FX controls will continue to dissuade foreign capital inflow, distort domestic capital allocation (by favouring those with privileged access to FX for imported inputs and machinery), and foster a large parallel market discount (c20% weaker currently);

  • Inflation is not yet tamed (13.2% in August, faster than 12.8% in July) and is set to remain way above the 6-9% central bank target, driven by the combination of food price inflation (25% of the rice harvest was damaged by floods, herder-farmer clashes over land persist), FX shortages for food imports, VAT increase from 5% to 7.5% in February 2020, FX rate devaluation of 4% in March 2020, and fuel subsidy removal in September 2020); and

  • Labour disruption is on the cards with an indefinite general strike planned by the largest union federations (Trade Union Congress and Nigeria Labour Congress, which include oil sector workers) to start on 28 September.

The standout stocks were Lafarge Africa (up 27%), which delivered better than expected Q2 results (30% yoy operating profit growth driven by cost savings, while revenues fell 5% yoy), and Nigerian Breweries (up 43%), as 38% shareholder Heineken continued to purchase shares.

See: Nigeria: Deep value or deep trouble? (Mar 2020), Nigeria responds to monetary policy dilemma with a surprise rate cut (Ogunkoya, Sep 2020), and Nigeria: Food ban entrenches flawed FX policy (Curran, Sep 2020)

Wider Europe

Hungary (down 14%), Poland (down 13%), and Czechia (down 11%) were the weakest in the region and globally across EM-FM. FX rate depreciation was a common factor with declines of c5% for each, directionally similar to the Euro (down 2.6%). Each market is now on a c30% discount to 5-year median trailing PB. FX weakness should help exporters like Hungary pharma company, Gedeon Richter.

In Poland, political parties in the ruling coalition reached an agreement on 26 September to preserve the coalition and avoid a minority government or an early election but the underlying tensions remain. The core reasons for the disagreement were:

  • The loss of seats, after the October 2019 parliamentary election, from the largest party in the coalition (Law and Justice, or, PiS, 43.0% of seats) to its two junior partners (United Poland, 4.1%, and Agreement, 3.6%), which resulted in PiS concessions to these partners on social security contribution limits and the presidential election delay, as well as obstruction by these junior partners of other parts the legislative agenda (eg animal protection, state official immunity) and the allocation of cabinet seats; and

  • A succession struggle for leadership of the parliamentary right-wing of the political spectrum (in advance of the ultimate retirement of 71-year-old Jaroslaw Kaczynski, who heads PiS) between Prime Minister Mateusz Morawiecki (PiS) and Justice Minister Zbigniew Ziobro (United Poland).

In Hungary, company-specific issues are also hurting the large stocks although, perhaps, undeservedly because of their limited impact or because they are not new problems:

  • Bank OTP (down 15%, 57% weight in MSCI Hungary) was hit by the extension of the moratorium on loan repayment;

  • Pharma Richter Gedeon (down 12%, 26% weight) was impacted by news of ongoing progress for a potential competitor in the US for its Vraylar drug; and

  • Oil & gas integrated player MOL (down 12 %, 17% weight) is not paying a dividend in 2020 (AGM decision was taken in April 2020) and is not seeing much progress in resolving its dispute with the government in Croatia over its 50% stake in INA.

Turkey (down 1%, with FX rate down 4%) was a relative outperformer, mainly after its surprise rate hike on 24 September. FX rate pressure should ease in the near-term. Turkish equities are on a 25% discount to 5-year median trailing PB.

It is too early to declare whether this rate hike is a one-off or a sign of renewed central bank independence. Either way, alarmingly low FX reserves (short-term external debt is over 3.3x reserves, import cover is merely 2.3 months) mean further hikes are required (real interest rate is still negative 1.5%).

See Turkey: Surprise rate hike will ease currency pressure but is no panacea (Curran, Sep 2020) and Turkey: The only chart that matters – interest rates and inflation (June 2020)


GCC equities (MSCI GCC) broadly tracked the 10% increase in oil price over July and August 2020. However, despite the drop in oil price (down 7%) in September and weakness across oil exporter peers (Colombia down 8%, Kazakhstan down 5%, Russia down 7%), GCC (up 2%) has outperformed. Fiscal break-even oil prices in the GCC range from half more to double the current oil price (except for Qatar).

See Saudi and GCC: Recent oil price drop is a risk for equities (Sep 2020).


Argentina (down 6%, with FX rate down 2%) performed in the middle of the peer group in LatAm (down 4-8%). Even with its sovereign default and a 19% yoy drop in real GDP in Q2 behind it, things are getting worse:

  • Tightening of capital controls on 15 September (eg companies which need to make debt payments above US$1m per month between mid-October and the end of March 2021 will be able to access merely 40% of that foreign currency need, triggering corporate defaults);

  • Imminent downgrade by equity index providers (from Frontier to Unclassified by FTSE Russell, and from Emerging to Standalone); and

  • Fiscal populism risks measures in the lead up to mid-term elections in 2021.

See Argentina GDP slump signals difficult outlook (Sep 2020) and Argentina equities: Never again! Easier said than done (Aug 2020)

Performance and valuation mtd summary

Strategy recap

  • Most emerging equity markets, outside the Technology sector (ie Tech-heavy China, Korea-Taiwan, and the international small EM Tech listings), are still down significantly ytd and risks remain high of a second wave of Covid-19 infections and second-round effects of the economic hard-stop (eg external debt refinancing in EM, disrupted food supply, sticky unemployment and banking bad loans, particularly in sectors exposed to technology disruption, remittance decline, political stress in the hardest-hit countries).

  • Africa (poor policy which stifles reform), LatAm (reliance on commodities and policy short-termism), wider Europe (ageing and small population), and the GCC (reliance on oil, the public sector and expats is not sustainable) have much less to offer than Asia (moderate reform and a path to manufacturing exports).

  • In large EM, India is imperfect but our top-pick, offering a relatively better mix of growth and value than its peers. In smaller EM and FM, Vietnam (diversified manufacturing exports), Pakistan (structural reform of governance), and Indonesia (cheapest relative to history) are our top three markets.

  • For more detail on our global EM and FM equity strategy outlook see Chasing technology's tail: EM equity strategy overview (June 2020).

Published this month


Technology stocks cheaper in Taiwan-Korea vs US or China, let alone small EM-FM, 25 Sep

Corruption: FinCEN Files a reminder of challenges for EM and ESG investors, 21 Sep

Remittances: Better than feared so far (in two charts), 17 Sep

EM central bank firepower (in one chart), 14 Sep

Gauging the economic impact of Covid-19: Q2 bleak (Culverhouse), 11 Sep


Indonesia: Among Asia's cheapest equities after recent 10% fall, 23 Sep

Malaysia: Fragile government in peril but no guarantee of a stronger one instead, 24 Sep

Sri Lanka: Eurobonds collapse on lack of IMF urgency (Curran), 17 Sep

Sri Lanka: Rajapaksas prioritise political over economic reform (Curran), 9 Sep


Saudi and GCC: Recent oil price drop is a risk for equities (in one chart), 13 Sep

Bahrain-Israel: Signal on Saudi intentions is ambiguous, 12 Sep

UAE-Israel: Geopolitical and economic aspects of the deal, 8 Sep

How to fix Lebanon's hyperinflation and currency crisis (Curran), 16 Sep

Lebanon: New premier faces uphill battle (Curran), 31 Aug

Wider Europe

Turkey: Surprise rate hike will ease currency pressure but is no panacea (Curran), 24 Sep

Belarus: Putin has Lukashenko's back, for now (Culverhouse), 15 Sep


Sub Sahara Africa manufacturing potential: Ethiopia tops our regional scorecard, 3 Sep

Angola: Bondholders dodge bullet as IMF approves EFF review (Culverhouse), 17 Sep

Ethiopia: Vast potential but growth model adjustment needed (Curran), 3 Sep

Kenya politics: Chief Justice advice to dissolve Parliament adds to our caution, 22 Sep

Nigeria: Food ban entrenches flawed FX policy (Curran), 13 Sep

Nigeria: Discussion with IMF Mission Chief (Curran), 2 Sep

Zambia: Botched budget a bad signal for bonds; downgrade from Buy to Sell, (Curran), 26 Sep

Zambia: Interest deferral is first step to restructuring (Curran), 23 Sep


Argentina GDP slump signals difficult outlook (Culverhouse), 23 Sep

Bolivia: Uncertainty continues ahead of October election re-run (Culverhouse), 25 Sep

Most Viewed See all latest