We think the IMF’s Article IV (published 25 March) confirms our earlier view that a debt restructuring is necessary even if Sri Lanka secures an IMF programme, as it will be unable to credibly place debt on a sustainable path without restructuring (and thus will have to restructure its debt to unlock IMF support, given its policy against lending to countries with an unsustainable debt burden).
We downgrade Sri Lanka's eurobonds to Sell at a price of US$51.1 for the SRILAN 6.85 03/14/2024s and US$48.4 for the SRILAN 6.2 05/11/2027s. While there is some upside in our base case recovery at lower exit yields, we think risks are skewed firmly to the downside.
We also maintain our Sell recommendation on the SRILAN 5 ⅞ 07/25/2022s.
We reiterate our Buy on MOZAM 5% 2031s, with a yield of 10.9% (price US$85.1) as of cob 28 March on Bloomberg (mid-price basis). The bonds rose 1.5pts on 28 March, likely on the news that the IMF had reached staff-level agreement on a new three year Extended Credit Facility for Mozambique. The programme is for an amount of US$470mn (150% of quota).
We have long argued that an IMF programme would add to the investment case for Mozambique, even as the government's interest in a programme see-sawed, as it would give the seal of approval to the sound policies that the government has already been pursuing and provide a catalyst for other official sector financing, after the reputational damage left by the hidden debt crisis. It may also provide some reassurance to ESG-focused investors.
In emerging markets, the most populous countries such as India, China, Brazil and Indonesia attract more VC investment than their income levels warrant. We think this is because many VC investors are focused on identifying world-beaters, which may be more likely to emerge from the biggest individual markets. But, due to their limited in-house resources, these investors may also feel more comfortable investing in markets they already know.
In contrast, most emerging markets are not attracting as much investment as they should, based on their income levels. Many of these economies are small, but this is not universally the case. Saudi Arabia and the UAE are key counter-examples; success here could be a launching pad for the GCC and wider MENA region. Other emerging markets with sizeable (>US$1bn) VC funding shortfalls include Thailand, Malaysia and Bangladesh.
While many startups can now command US$1bn+ valuations, for smaller funds, a focus on some of these underserved emerging markets could help to deliver outsized investment returns.
We recently upgraded Indonesian e-commerce firm Bukalapak to Buy from Sell, with a new DCF-based target price of IDR456 (up from IDR298 previously). Bukalapak has lost 64% of its value since its IPO in August 2021 and we think it now offers deep value.
The Indonesian e-commerce player focuses on the country's 13.5mn micro, small and medium enterprises. Its principal targets are the tier 2 regions of Indonesia – ie those beyond metropolitan Jakarta and Surabaya.
When Bukalapak listed on the Jakarta Stock Exchange – the largest IPO in Indonesian history – we said at the time that it was grossly mispriced, and the subsequent slide in the share price has burnt those investors who bought into the hype.
But now we think the shares have reached deep value territory – net cash represents a whopping 75% of Bukalapak's market cap – and the stock could emerge as a proxy for the ASEAN e-commerce expansion.
In the full report, we take a closer look at the key reasons for our Buy recommendation and why it is now time to reassess Bukalapak's prospects.
Russian controls c20% of the global arms trade, and its market share is second only to the US. Its major arms exports are roughly three times larger than those of all other emerging markets combined, and it is the arms supplier of choice for many EMs.
Countries will now face diplomatic pressure to shun Russian arms. Meanwhile, demand for military hardware, especially air defence systems at which Russia excels, will grow.
However, for many countries in the emerging world, US and other western weaponry will remain too expensive, too complex and, given conditionality, too difficult to procure.
If the US is going to succeed in pressuring these countries to sever their reliance on Russia, it will need to offer an alternative.
Turkey, South Africa, India, Israel and, possibly, Brazil could seize the opportunity to profit from Russia’s predicament. In the full report, we look at the potential for each of these countries in more detail.