Strategy Note /

Disruptive Technology and low FX controls risk in small EM via overseas listings

  • Stocks listed on international exchanges, eg NY, London, Singapore, come into their own if capital controls risk is high

  • Small EM's most liquidly traded disruptive tech stocks (content, e-commerce, delivery, payments) on these exchanges too

  • We screen 85 international listings with small EM-FM exposure for trading liquidity, valuation, balance sheet strength

Disruptive Technology and low FX controls risk in small EM via overseas listings
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
17 April 2020
Published byTellimer Research

The current crisis is, among other changes, creating higher risk of capital controls across a number of countries in the small emerging markets universe and accelerating the adoption of disruptive technology globally. 

There are many companies with business operations mainly in the small emerging and frontier markets that are listed on international exchanges, eg New York, London, Singapore, either directly or via depository receipts, and should provide insulation from the direct risk of capital controls. We screen 85 of these below for exposure to disruptive technology and for trading liquidity, attractive valuation and balance sheet strength. 

Stocks highlighted by this screen include three with exposure to disruptive technology business models and some of the highest trading liquidity (Mercado Libre, Sea, Delivery Hero) but these have already outperformed the broader developed, EM and FM indices. 

Cheap and liquid exposure to themes like mobile payments in Africa (MTN Group, Airtel Africa), manufacturing relocation and sourcing away from China (Youngone Corp), agricultural commodity inflation (First Resources) and strong franchise, relatively liquid banks (CIB, Halyk, NLB) has so far under-performed and may represent an opportunity. 

Mitigating capital controls risk 

For foreign investors, these provide access to small EM-FM exposure with a number of benefits compared with locally listed stocks:

  • Lower trading cost (generally much lower trading commission rates, and much less friction in establish trading access)

  • No direct risk that official FX rate distress creeps into a parallel market discount and quasi capital controls; eg Argentina imposed capital controls in August 2018, Lebanon's financial collapse effectively rules out repatriation for most, Nigeria may have a backlog of close to US$1bn waiting to repatriate, and Zimbabwe has, for years, been very cumbersome and costly to repatriate from. 

  • Protection from ad hoc local market interference and closures of the sort seen during Covid-19 in Bangladesh, Mauritius and Sri Lanka.

The disadvantage of some of these listings is very low trading liquidity; an issue we address in our stock screen below.

International listings screen: Valuation, trading liquidity, balance sheet strength

Our screen of those stocks for disruptive technology exposure, trading liquidity (above US$1m per day), attractive valuation (trailing PB of below 1.5x, PE below 15x, or DY above 3%) and balance sheet strength (net cash above 10% of market cap or, for banks, loans/deposits below 75%), highlights the following.

  • Technology (digital content, e-commerce, online advertising, mobile payments, payment processing, IT software services, delivery): 

    • Africa - MTN, Jumia, Opera, Airtel Africa; 

    • Asia - Sea;

    • Europe-CIS - EPAM Systems; 

    • LatAm - MercadoLibre, Globant, Despegar; 

    • Middle East - DeliveryHero, Network International.

  • Oil and Gas: 

    • Africa - Tullow; 

    • Europe-CIS - Energean; 

    • LatAm - YPF.

  • Materials: 

    • Europe-CIS - Kazatomprom, Kaz Minerals; 

    • LatAm - Southern Copper; Global - Ferrexpo.

  • Agriculture: 

    • Asia - First Resources.

  • Banks: 

    • Europe-CIS - Bank of Georgia, Halyk Savings; 

    • LatAm - Credicorp, Bancolombia, GF Galicia, Banco Macro; 

    • Middle East - Commercial International.

  • Building Materials: 

    • LatAm - Loma Negra.

  • Industrial: 

    • Asia - Youngone Corp

  • Transport: 

    • LatAm - CAA.

A spreadsheet version of the graphic below is available on request.