Strategy Note / Global

Frontier-EM Equity Monthly: May – Odd dispersion as most underperform mega tech

  • Mega Tech (FANG+) outperformed again, though one might have expected “old-world” equities to keep pace as lockdown eased
  • Nigeria and Russia both up over 10% on higher oil price, but Colombia, Kazakhstan, and Saudi-GCC were flat or down
  • Within smaller EM and FM, Vietnam and Pakistan remain our top two markets

Dispersion but with no clear pattern. In May, the global macroeconomic backdrop saw a continuation of trends visible in April: ramped up economic policy stimulus (fiscal spend, monetary easing, debt issuance and assistance), phased re-opening of the global economy, and a more stable US$. One marked difference was the bounce in oil price (up over 40%). In this context, there was surprising dispersion:

  1. Mega Tech (FANG+) outperformed again, even though one might have expected more “old-world” equities (whether in DM or EM) to keep pace as lockdowns ease. 
  2. China and Korea-Taiwan tech, the largest parts of EM, underperformed despite the stable US$. While US-China friction, Hong Kong disruption and previous outperformance might explain weakness in China and, at a stretch, Taiwan, those factors are not present in Korea. 
  3. Brazil and India are both lifting lockdowns before flattening the infection curve (ie choosing deaths from Covid-19 over more deaths from poverty), yet Brazil has outperformed India by over 10%.
  4. Nigeria and Russia were both up over 10% on the back of higher oil price, but Colombia, Kazakhstan, and Saudi-GCC were flat or down. 
  5. Vietnam was up over 10% on lockdown easing and hopes for manufacturing relocation from China, but this sentiment did not spread to other Asian manufacturers (Indonesia, Malaysia, Philippines). 
  6. Romania was up over 10%, perhaps on hopes for more coordinated, concerted fiscal stimulus from the heart of the EU (following Merkel and Macron’s proposals for a recovery fund distributed via grants, not repayable bonds, ie a potential precedent for fiscal union). This was almost a 10% outperformance compared to other EU members like Croatia, Czechia, Hungary, Poland or EU-linked markets like Morocco.
  7. Iceland was up over 10% amid hopes of easing travel restrictions but other island tourist destinations like Jamaica and Mauritius barely moved.
  8. Bangladesh’s equity market has remained shut (due to reopen on 31 May) while the other ad hoc closures, Jordan and Sri Lanka, ended.

Equity markets, outside mega Tech, 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). Within smaller EM and FM, Vietnam (diversified manufacturing exports) and Pakistan (structural reform of governance) remain our top two markets.

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

  • Global EM: Remittance exposure, IMF emergency financing, fiscal responses, active versus passive funds.
  • Geopolitics: Deteriorating US-China relations (through the lens of Trump’s election sensitivity, Biden’s foreign policy, Hong Kong’s security law, and Renminbi depreciation), GCC US$-pegs (reserves are sufficient to maintain them but the pegs should go), authoritarianism and inequality in domestic politics after Covid-19, fettered capitalism after Covid-19.
  • Country-specifics: Argentina and Lebanon debt restructuring, Ghana and Nigeria after the lockdown, Kazakhstan’s succession risk, Kenya’s ruling party divorce, Malaysia’s Mahatir and Anwar reunite to challenge government, Philippines President Duterte’s détente with big business, Saudi’s unilateral move on tax, Tajikistan recovery, Ukraine’s IMF agreement, Uzbekistan reforms, Vietnam’s aging population.

The rest of this report (available to Insights Pro subscribers) comprises the following:

  • Hyperlinked catalogue of our strategy and macro notes published this month (p3).
  • Charts on performance, liquidity, valuation updated as of 27 May 2020 open (p4).
  • Screen for FX rate vulnerability (p8).
  • Country snapshots of market, macro, political and social indicators (p9).



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