Strategy Note /
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Frontier-EM Equity Monthly – April: Bounce, but not necessarily from the bottom

  • April’s bounce has been driven by ramped-up economic stimulus, phased re-opening of the economy, and a more stable US$.

  • In EM, technology (+7%) and Russia (+8%) outperformed. Brazil was a laggard (-6%).

  • In FEM, Vietnam shone (up 17%), Kuwait spluttered (-1%). In FM (+4%), three markets were shut the entire month.

Frontier-EM Equity Monthly – April: Bounce, but not necessarily from the bottom
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

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Tellimer Research
28 April 2020
Published byTellimer Research

April’s bounce has been driven by ramped up economic policy stimulus (fiscal spend, monetary easing, debt issuance and assistance), phased re-opening of the economy, and a more stable US$. Equity markets are still down heavily 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).

EM up 4%; Technology outperformed (with the five tech stocks – Alibaba, Tencent, TSMC, Samsung, Naspers – which account for almost a quarter of the EM index, up 7%, weighted by their index contribution). Russia (up 8%) benefited more from the resumption of OPEC+ cooperation, a fiscal stimulus plan of 2% of GDP, and a 50bp policy rate cut, than it suffered from the continued fall in oil price (Brent down 9%). Brazil (down 6%) fell on late coronavirus action, disagreements between President Bolsonaro and the heads of his Economy and Justice ministries, the Supreme Court investigation Bolsonaro faces, and further BRL devaluation (-7%).

FEM up 3%: Vietnam (8% weight in the index, up 17%) outperformed (across all sectors) on high confidence in Covid-19 containment and an expanded fiscal stimulus (3.5% of GDP). Kuwait (20% weight, down 1%) underperformed after the MSCI decision to postpone EM index inclusion from May to November (which postpones passive inflows), delays in parliamentary passage of the sovereign debt ceiling law (which constrains fiscal space), and amid the continued fall in oil price.

In other small EM, Pakistan (up 14%) was helped by an even fuller reversal – with IMF consent – of austerity (cumulative 425bp policy rate cut since mid-March, fiscal package of 2.5% of GDP, US$1.4bn disbursed via an IMF Rapid Financing Instrument to combat Covid-19) and partial re-opening of the economy (eg construction). The IMF was also unequivocal in its warning that rapid donor support remains critical. The UAE (up 13%) was buoyed by partial re-opening of the economy (malls and offices) and hopes around the fiscal stimulus (2% of GDP) and banking regulatory easing (potentially up to 20% of GDP). Thailand (up 11%) was boosted by a net fiscal stimulus package of 6% of GDP and phased lockdown easing. Mexico (down 6%) was driven by FX depreciation (in turn due to current account pressure from lower oil prices and a 100bp policy rate cut).

FM up 3%; Nigeria (up 11%) outperformed despite a queue for FX repatriation, accelerating inflation, fiscal budget cut, continued oil price decline, and the Covid-19 related death of a close ally of President Buhari. The move was entirely driven by local investors (who face restrictions on investing in high yielding open market operations auctions). Kenya (up 3%) seemingly paid little attention to further deterioration in the locust threat (agriculture is c35% of GDP). Three markets have been shut throughout April: Bangladesh (may re-open on 5 May), Jordan, and Sri Lanka (may re-open on 4 May).

Our published reports this month have looked at the following issues:

  • Covid-19: Policy dilemma of starvation versus Covid-19, quantifying economic policy responses, risks to the aged political elite.
  • Oil price collapse: Net import or export exposure, second-round effect on remittances, GCC vulnerability.
  • Long-term themes: Geopolitics (US-China cold war, EU and GCC fragmentation), reserve currencies (risks to the US$), business model disruption from new technology.
  • Markets: The pull within EM of China and Tech, the arguments in defence of small EM and FM funds, the international listings in small EM and FM which give access to Tech and mitigate FX controls risk.
  • Country-specifics: Kuwait index upgrade delay, Kenya locusts threat, Argentina debt restructuring.

The rest of this report comprises the following:

  • Hyperlinked catalogue of our strategy and macro notes published this month (p3).
  • Charts on performance, liquidity, valuation updated as of close 28 April 2020 (p4).
  • Screen for FX rate vulnerability (p8).
  • Country snapshots of market, macro, political and social indicators (p10).

April in the markets

Source: Bloomberg, as of 27 April 2020 close