Strategy Note /

Large EM equity strategy: 2023 outlook

  • Large EM equity markets may not de-couple from the US but they are more attractively valued vs. the historical average

  • In 2022, commodity exporters (Brazil, SA, Saudi) outperformed Tech (Taiwan, Korea), China (Covid, property, US friction)

  • This year, we expect a reversal of that pattern, with steady grower India again in the middle of the pack

Large EM equity strategy: 2023 outlook
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
3 January 2023
Published byTellimer Research

The largest emerging equity markets – China-Hong Kong, India, Taiwan, South Korea, Brazil, Saudi Arabia and South Africa, which collectively make up over 80% of the MSCI EM index – offer exposure, with varying degrees of attractive valuation and depth in liquidity, to the themes we look for in our overall EM equity strategy: sovereign external account resilience, manufacturing, commodities, tourism and technology. Against a global backdrop of stuttering and uneven growth, all of these themes should have a role to play, with no single one consistently leading.

None of these large emerging equity markets are vulnerable to the sort of external account and currency risks that might have derailed the investment case in the largest EM countries a generation ago and that do impair a number of markets that sit in the long tail of smaller emerging and frontier equity markets (where sovereign dollar bonds probably represent a more palatable option than local currency equities).

While these large EM equity markets are not immune from the negative trade, investment and portfolio contagion impact from rate hikes and weaker growth in the US and EU – the world may be de-globalising and on a path, in some respects, to a tripolar one, but that is not to say that emerging markets are de-coupling from developed ones – they are, in general, more attractively valued.

Most of these large EM equity markets are cheaper versus the historical average than the US on multiples such as price/book and price/earnings, and their currencies are cheaper, when looking at the historical average real effective exchange rate (REER).

Most Large EM equity markets cheaper vs history than US

Currencies in large EM look cheaper than the US Dollar

Our preference for the largest countries in emerging market equities is as follows, in descending order: China, Taiwan, Korea, India, Saudi Arabia, Brazil, South Africa.

Broadly, this would represent a reversal of the performance seen in 2022, when the commodity exporter markets of Brazil, South Africa and Saudi Arabia, helped by the Russia-Ukraine War, outperformed the Tech-centric markets of Taiwan and Korea, hurt by hikes in global interest rates and the end of the Covid-related boom, and China, which was weighed down by its zero-Covid strategy, property crisis and worsening relations with the US.

Commodity exporters outperformed China and Tech in 2022

China-Hong Kong

China has clearly fallen off its perch for many EM investors, with long-term risks spanning dictatorial governance, human rights abuses and pollution at one end, to wage inflation implied by population ageing and decline, to the difficulty in reorienting the economy from exports in a globalised world to consumption in a localised one, to the sanctions and higher military spend that might result from greater geopolitical friction.

2022 featured slowing growth, the zero-Covid strategy, a property crisis, regulatory restrictions on Tech companies, the coronation of Communist Party General Secretary Xi Jinping and the staffing of the Politburo with his loyalists, domestic mass protests, as well as heightened tensions with the US, over Taiwan and technology access.

The injection of state support into the property sector and the end of the zero-Covid strategy should boost domestic consumption and smooth the production of manufactured exports and a positive real interest rate – currently 1.2% – should allow for further stimulus.

However, slowing global growth will act as a headwind and there is no sign of any thaw in relations with the US, with the attendant risk of further trade and investment barriers.

China's representation in global equity indices (below 3.5% of MSCI ACWI) is still well below its share of global market capitalisation or GDP (c20%) and Chinese equities are under-owned by its domestic population (10% of household wealth) compared with the US benchmark (30%).

A return to more pragmatic policies and faster growth, albeit lower than the average of the past two decades, should provide a reminder of the durability of the political system and, at valuations that are still below the historical average, the strengths of its investment case.

For more, see China's pragmatic policy turn signals an end to self-harm (December 2022).

Taiwan and South Korea

Higher risk-free rates, which drag down long-duration Tech company valuations, slower global demand growth for Tech products (following the Covid boost), the US regulatory restrictions on sales of advanced Tech to China, and a wider recognition of the geopolitical flash points between China and Taiwan and South and North Korea, all dragged down Korea and Taiwan equities in 2022.

The potential peak for US rate hikes should help Tech valuation estimates stabilise but there is little to suggest upside on Tech demand, or relief on sanctioned Tech sales to China or geopolitical tension.

However, neither Korea nor Taiwan have material external debt or domestic political risks, and most of the Tech companies that dominate the equity indices of both countries are sitting on strong balance sheets.

Fundamental factors are not ideal but by no means in distress. Tech demand should eventually recover and the competitive position of TSMC, in particular, remains unrivalled (the semiconductor self-sufficiency subsidy race in the US and the EU is not going to change this any time soon).

Valuations are at relatively attractive levels compared with historical averages given the cyclical nature of Tech demand and the ability of the largest Tech companies to weather the downturn.

In terms of geopolitical risk, while there appears no path to detente in China-Taiwan or South-North Korea relations, there is also little prospect of a quick victory for either China or the US should these conflicts escalate into a hot war.

For China, the Russian experience in Ukraine is a demonstration of the battlefield quagmire and the long-term strategic losses (economic damage from US sanctions, loss of support from previously neutral, or low military-spending, states) that might occur should it press its claims on Taiwan or (tacitly) support an attack by North Korea.

For more, see Semiconductors split by US-China de-coupling (October 2022).


India’s investment case strengths are relatively stable domestic politics, high growth and the absence of external debt. These features should persist.

Prime Minister Modi and his BJP’s re-election in 2024 appears on track after the resounding victory in the Uttar Pradesh state elections in 2022. While structural economic reform efforts appear to have stalled in favour of electioneering, eg agricultural reforms were sacrificed to appease protesting farmers, and the protection of minority rights is under stress, large corporates will be more comfortable with a continuation of BJP rule than a change to government run by what remains a fragmented opposition, which is, at best, competitive at the local level and, at worst, hopelessly uncoordinated at the federal level.

Without these structural reforms, India likely does not fully take advantage of the opportunity to grow its manufacturing base, as the only country with the potential scale to match China.

But there is a lot of growth ahead without that by simply managing legacy bad loans in the state-owned banking sector, and allowing the market for private sector lending to corporates and consumers to function relatively freely.

The main risks to the investment case are valuation – which is at a greater premium to the historical average than most peers in large EM – the reliance of economic growth on loose monetary and fiscal policy – with a real interest rate close to zero and fiscal deficits close to 10% of GDP – and, the growth of military spend as a percentage of GDP as India plays a bigger geopolitical role, which inevitably means more friction with China.

For more, see India: Reform and Illiberalism after Modi's BJP state elections success (March 2022) and China and India scuffle in the Himalayas again (December 2022).


The transition of power from rightist Bolsanaro to leftist Lula does not derail the overall fiscal trajectory of Brazil – with fiscal deficit of 7.5% of GDP and government debt of almost 90% in 2023, according to IMF forecasts – any more than was already the case after Covid and Bolsanaro’s populist turn.

Furthermore, the unpopular reforms of state-owned enterprises and the tax system are no more likely to be enacted now than under the previous administration.

The decline in Brazil equities following Lula’s election victory suggests that this is a non-consensus view and that most investors want to see proof that fiscal spend will not be reckless.

Yet, the fragmentation of Congress likely restricts Lula’s ability to spend – eg the constitutional amendment passed by Congress in December 2022 to allow Lula to deliver on his campaign pledge on 'Bolsa Familia' welfare spend covered merely one year of his term rather than the initial proposal of all four years – and Brazil’s debt problem is one of too much domestic, as opposed to external, debt – short-term external debt is merely 5% of GDP.

Brazil remains a play on prudent monetary policy, with a positive real interest rate of almost 8%, relatively cheap currency reverting closer to the historical average (over 20% appreciation is implied should REER revert to the 10-year median) and on exports of commodities like food and iron (net commodity exports are 6% of GDP).

Valuation, despite a positive re-rating in 2022, remains at a bigger discount to the historical average than all peers in large EM.

For more, see Brazil: Lula beats Bolsonaro – winning was hard, governing will be harder (October 2022).

Saudi Arabia

For much of 2022, the stars could not have been more aligned for the Saudi investment story: persistent OPEC+ discipline and high oil prices (net fuel exports are c25% of GDP), an unshakeable currency peg during a period of US dollar strength, the continuing boost for consumer and corporate activity from social reform (eg driving licences for women, more relaxed rules on public gatherings and entertainment), mega project announcements (eg airport upgrades, Red Sea tourism), much more liberal visit visas (particularly important for religious tourism), the climb down of the Biden administration on its hawkish attitude towards the Crown Prince, and the removal of Russia, the only other very liquidly-traded oil-exporter in large EM, from the international investor radar.

Yet, Saudi equities, even before the oil price drop towards the end of 2022, perhaps did not outperform EM to the degree that such a near-perfect backdrop warranted.

This suggests that Saudi equities remain driven by high-net-worth local investors, who run global multi-asset portfolios and are vulnerable to global contagion, and, at the margin, foreign investors, who remain more comfortable investing in alternative commodity exporters like Brazil, with a longer history of investor accessibility, more gearing to high commodity prices and a much larger population.

Although much of its fundamental investment case remains very positive, this characteristic in its investor base may hold back the performance of Saudi equities relative to its large EM peers.

For more, see Saudi revisited: Pilgrims back for Hajj, might investors return too? (July 2022).

South Africa

The captive domestic investor base, manageable external debt (short-term external debt is c10% of GDP), and net commodity exports (almost 7% of GDP) are the strengths in South Africa’s investment case.

However, political paralysis persists, driven by divisions within the ruling ANC party, and this is throttling much-needed structural reform on issues such as state-owned enterprises, particularly Eskom, where power outages are debilitating manufacturing output, fiscal deficit control (c5% of GDP) and land ownership, and is enabling a deterioration in governance and law and order, which is causing lasting social and economic damage.

South Africa equities are cheap versus the historical average but perhaps not at an attractive discount – either in absolute terms or compared with the discount on offer in its closest peer, Brazil – given the political risk from the 2024 general election and potential formal split of the ruling party, and social risk amid one of the worst levels of income inequality (the top 10% have 67% of national income) and youth unemployment (50%) globally.

For more, see South Africa: The ANC's split is core to corruption, reform and unrest risk (Dec 2022).

Ranking the large EM equity markets

Our EM Country Index ranks the investment case of 50 emerging and frontier markets and the US, as a developed comparable.

We weight c30 factors on growth, policy credibility, politics, sanctions, ESG, equity valuation and liquidity. The weights are adjustable; eg equity market liquidity (where the US and China outsize all others) can be cut to a zero weight.

Tellimer EM Country Index ranks emerging markets and US

Equities more concentrated than EM debt

The largest seven emerging equity markets account for over 80% of the MSCI EM Equity index. This country concentration is much greater than that seen in, for example, the JP Morgan EM Bond index.

EM Equity index is highly concentrated

EM Bond index is spread across many more countries

Broader EM equity strategy thesis for 2023

Uneven and stuttering economic global growth suggests that no single investment theme will consistently outperform.

A single country, sector, region, or theme is unlikely to lead global equities against a backdrop of uncertainty over a number of factors such as the:

  • Duration of high inflation;

  • Depth of the recession in developed markets;

  • Normalisation of supply chains after the unprecedented Covid disruption;

  • Flare-up of domestic political and international, geopolitical flash points; and

  • Persistence of the US dollar's safe haven status.

Therefore, our overall approach to emerging markets equities is to favour active strategy over passive index-tracking, and to look for relatively cheap exposure to a number of themes:

  • Sovereign balance sheet resilience, rare structural reform;

  • Manufacturing growth winners in the marginal shift away from China;

  • Commodity exporters who stand to benefit from prices buttressed by capex restraint and the shift to renewable energy;

  • Tourism plays heading towards full post-Covid recovery; and

  • Technology companies with strong balance sheets and proven competitive advantage, which are best able to weather the downturn in demand growth.

For more on this overall emerging market equity strategy view, please see this previously published report and for the latest full country index.