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Market Voice: Opportunities in EM equities?

Ron Leven
Ron Leven
Professor of Economics at Duke University

Emerging markets (EM) are under more pressure, with coronavirus adding to the recent signs of economic and commodity price weakness. February’s Market Voice uses Eikon charts to examine the EM equities outlook, including the risks facing Russia and Brazil.


  1. Even before the coronavirus outbreak, EM equities were showing signs of strain from the indirect threat of slower growth and declining commodity prices.
  2. Stock markets in Brazil and especially Russia, look vulnerable to a substantial downside if the commodity price weakness persists.
  3. India is an outperformer among EM countries in terms of real growth and equity market gains as the country benefits from its exposure to lower commodity prices.

Equity markets made an enthusiastic start to the year as both the SPX and STOXX 600 indices rallied in January before hitting record highs in early February.

Japan’s TOPIX slipped lower in late January in response to coronavirus, but has bounced back and is again testing all-time highs.

The virus scare is now weighing on these markets, but they still remain near or above their 2019 closing points. Emerging market equities initially joined in the new year rally, but started to sell off in mid-January and are now roughly three percent below the 2019 close.

While the weak EM equities performance may reflect the more direct threat from coronavirus, Figure 1 suggests these markets are suffering more from the indirect threat of slower growth and consequent declining commodity prices.

EM equities underperformance

As the SPX has been such a dramatic outperformer over the past two years (the SPX gained 24 percent to the STOXX’s nine percent), all markets look weak in comparison.

Consequently, in Figure 1, the EM equities performance is normalized by comparing it — on a currency adjusted basis – with the STOXX 600 European index. Copper prices are widely taken as a good barometer of global economic activity, and tell a story of EM equities being particularly sensitive to global growth.

Worries of slower growth in response to U.S.-China trade tensions was an ongoing theme in 2019 which caused the downtrend in copper prices.

As many EM economies are heavily dependent on commodity or manufacturing exports into the industrial world, the prospect of a global slowdown caused their equities to underperform through much of 2019.

The year ended with a rebound, on signs of easing trade tensions, but the gloom quickly resumed as it became apparent that the coronavirus was taking a serious toll on economic activity.

Figure 1: Emerging market vs European STOXX Indices and copper prices

Chart showing Emerging market vs European STOXX Indices and copper prices. Market Voice: What’s up with EM equities?
Source: Eikon

Figure 2: EM Equity and GDP Growth

Figure 2: EM Equity and GDP Growth. Market Voice: What’s up with EM equities?
Equity market gains since the end of 2017 for major emerging market currencies vs. annual real growth (green upper median/red lower median). Source: Eikon

India’s commodity benefit

It may be overly simplistic to treat emerging markets as a unified group when the countries included are geographically diverse with varying reliance on commodity exports.

The table above compares total local equity market gains since the end of 2017 for the major emerging market countries and their annual real growth during this period.

The relationship between market and economic performance is modest but notably the two lowest growth countries — Turkey and South Africa — were also the weakest equity markets.

Notably, India was relatively high for both equity performance and GDP growth. As a commodity importer it benefits from the global price declines and its exports are more skewed to services so less susceptible to coronavirus-related supply chain disruptions.

China is a downside outlier with below average equity performance despite achieving the highest GDP gains but this can be explained by the uncertainties from the U.S. trade war and, recently, the outbreak of coronavirus.

Brazil’s stock market premium

The two upside outliers are Brazil and, especially, Russia, which achieved the best equity performance despite sub-standard growth. Both countries are heavily dependent on commodity exports so should, in theory, be sensitive to declining prices.

Figure 3a: Brazilian equities and soy beans price

Chart comparing Brazilian equities and soy bean prices. Market Voice: What’s up with EM equities?
Source: Eikon

Figure 3b: Russian equities and crude oil price

Chart comparing Russian equities and crude oil prices. Market Voice: What’s up with EM equities?
Source: Eikon

While Brazil is a diversified economy with close to self-sufficiency for energy, roughly 15 percent of exports are soy products. Iron ore is close to 10 percent and other agricultural commodities add another five percent.

As shown in Figure 3a, the Brazilian stock market, relative to the EM index, has generally tracked soy bean prices, but a serious misalignment occurred in the past year with the stock market premium vs EM at a five-year high while soy bean prices sit close to 10-year lows.

Russia is heavily dependent on the energy sector, which accounts for roughly half of total exports. As in Brazil, a divergence occurred last year with equities outperforming EM despite a downward trend in oil prices.

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Is there more to Russia than oil?

Based on Figure 4, the answer is that there does not seem to be much else behind the equity market outperformance.

The energy sector has indeed put in great returns — up over 20 percent — but the same cannot be said for the rest of the economy. The related mining sector is up only about five percent and telecoms is only slightly better, so there is no emerging tech boom. Other sectors fell, and therefore energy is the only major growth sector of the economy.

Figure 4: Russian equity sectoral gains since 2017

Chart showing Russian equity sectoral gains since 2017. Market Voice: What’s up with EM equities?
Source: Eikon

And there is no indication that Russia is making up for lower prices with higher export volume. Indeed, as shown in Figure 5, export volume after surging last year is tailing off and there has been a parallel decline in export earnings.

Based on Datastream projections, oil production is set to steadily decline in the years ahead so the source of investor enthusiasm with the Russian stock market seems to be unsupported.

Figure 5: Russian oil export volume and total export revenue

Russian oil export volume and total export revenue
Source: Eikon

Unlike the Russian equity gains, which were concentrated in the energy sector, Brazil’s gains — while also led by extractive industries — were more broadly distributed. More importantly, the gains are more modest than Russia and roughly in line with GDP growth, so it is less clear that Brazil’s equity market is overshooting.

Figure 6a: Brazil equity sectoral gains since 2017

Chart showing Brazil equity sectoral gains since 2017  
Source: Eikon

Figure 6b: BOVESPA and Brazil GDP Y/Y growth 

Chart showing BOVESPA and Brazil GDP Y/Y growth 
Source: Eikon

EM equities performance: The bottom line

Efforts to prevent the further spread of coronavirus are already intensifying concerns about the pace of the global economy, and the main impact has been broad declines in commodity prices.

Equity markets are also showing signs of weakness, especially emerging markets that are more dependent on commodity exports.

India has been an outperformer among EM countries, both in real growth and equity market gains, because the country benefits from lower commodity prices.

There is less clear support for the outperformance of the stock markets in Brazil and, especially Russia, and they look vulnerable to substantial downside if the commodity price weakness persists.

While we remain constructive on the U.S. equity market, the slowdown in global activity is bound to create near-term resistance.

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