Strategy Note /

Tellimer's top picks: November 2022

  • We present five of our best current calls across economies, sectors, stocks and bonds for November

  • This month's picks: EM equities are cheap, Buy China equities, Buy Uzbekistan and Pakistan bonds

  • We have high conviction that insurance, digital payments, digital banking fintechs are most resilient to macro headwinds

Tellimer's top picks: November 2022
Tellimer Research
1 November 2022
Published byTellimer Research

1. Emerging market equities reflect well-known risks

There are many immediate concerns for emerging market equities but most of these are well known and reflected in cheap valuation of equity indices and currencies.

  1. The MSCI EM index is down 31% in the past year, with similar declines in MSCI FEM and FM, whereas the US S&P 500 is down 15%.

  2. On trailing price/book, EM is on a big discount (21% at the time of writing) to the five-year median, whereas the S&P is at a premium.

  3. Most large emerging markets exhibit a market capitalisation/GDP ratio ('Buffet indicator') below the 10-year average, whereas the US is at a 10% premium.

  4. The US real effective exchange rate is at a 17% premium to the 10-year median, whereas China and India are at 2-4% premia, and South Korea and Brazil are at 10-18% discounts.

Emerging market equities valuation de-rating

Report: Emerging market equities are cheap and reflect well-known risks

2. China is a cheap underperformer

China has long since fallen out of favour of the consensus of emerging market investors and this is reflected in its deep discounts to its historical average valuation.

China-HK equities among cheapest vs history in large EM

The HSI in Hong Kong and the Shanghai Composite in mainland China are on c50% and 25% discounts to their respective five-year medians on trailing price/book.

That discount is now large enough to prompt a revisit of the enduring strengths of the investment case – China’s scale in global manufacturing is irreplaceable, exports continue to grow despite ongoing US tariffs, China's representation in global equity indices remains far lower than its share of global market capitalisation or GDP – and the things that might go well – zero-Covid policy should ultimately relent, and a zero real interest rate implies capacity for policy stimulus.

From an investment perspective, we take China as it is, rather than as we or others might wish it to be.

Report: China – What happened to Hu?

3. Buy Uzbekistan bonds

We reiterate our Buy on the UZBEK 3.9% 2031 bond, while we still see the short-duration 4.75% 2024s as attractive for defensive investors.

Our positive view on Uzbekistan (B1/BB-/BB-) was based on the country's sound macro-policies, low government debt and strong external liquidity position, with low debt service on the bonds reinforcing ability to pay, and while the direct impact of Russia's war in Ukraine presented a significant risk to the outlook, we are reassured that this has not played out as initially feared, and, instead, the country continues to perform strongly. Given this, we remain positive on the bonds.

UZBEK 3.9% 2031 - price (US$)

Report: Uzbekistan – Notes from the 2022 IMF Annual Meetings

4. Buy Pakistan eurobonds

We reiterate our Buy recommendation on Pakistan’s eurobonds.

The risk of default is more than fully priced into Pakistan’s eurobonds, with the ‘31s now trading at cUS$37 versus an estimated recovery value of US$53-71 at a 12% exit yield. The tone from the State Bank of Pakistan after October’s policy meeting and rhetoric from the government affirming Pakistan’s commitment to service its external obligations is encouraging but, ultimately, ability to pay will trump willingness if Pakistan is not able to plug its external funding gap, and the new policy course outlined by Finance Minister Dar will make it even more difficult to avoid a crisis.

Pakistan's international sovereign bonds (US$)

Report: Pakistan's policy rate and debt relief plans on hold

5. The most resilient fintechs: Insurance comparison, digital payments and digital banking

With the annual IMF/ World Bank meeting highlighting that global macro risk remains skewed to the downside, we assess how 24 fintech products stack up across five top-down factors.

  1. Wholesale funding dependence

  2. Capital funding dependence

  3. Pricing flexibility

  4. Liquidity/leverage needs

  5. Squeezed consumer finances

From this top-down perspective, our work suggests the most vulnerable product areas include point-of-sale financing (such as buy now pay later – BNPL), consumer/SME financing and cryptocurrencies. In contrast, insurance aggregation/comparison services, digital payments and digital banking could prove more resilient.

Fintech scorecard: product sensitivities to macro headwinds

Report: The fintech business models most resilient to macro headwinds