Commodity prices are at levels not seen for a decade. Whether commodity price inflation translates into sticky inflation in services and wages and whether central banks in developed markets are responding appropriately are raging debates, with implications for asset allocation between bonds and equities or between technology and cyclicals within equities. Most emerging markets, which do not have the luxury of global reserve currency status, have responded much quicker, although there are exceptions, for example, China and India.
For emerging and frontier markets, in general, commodity price strength is a tailwind for growth and exports. The year-to-date outperformance of Brazil, Saudi, and South Africa in large EM, and, for example, Chile, Peru, and the GCC in FM has much to to do with this. Below, we chart commodity export exposure across EM, FM, and, for comparison, a selection of DM.
Note that the exceptions to the commodity windfall are Bangladesh, Jordan, Lebanon, Pakistan, and Philippines. These countries are net importers of both food and fuel, and low incomes mean that the share of household spend on these items is high.
Our EM-FM equity strategy remains that against a backdrop of stuttering global growth tech, commodities, tourism and manufacturing exposure all have a place, at the right price (eg where valuation is at a significant discount to historic average).
2022 EM equity strategy, Jan 2022
Oil importer alarm bells ring, Jan 2022
Food prices at ten-year peak but decelerate for fifth month in a row, Feb 2022