Colombo June 8, 2022: Sri Lanka rebounded by 14% after the country appointed a new coalition government led by former Prime Minister Ranil Wickremasinghe. It was seen as a step toward reducing the unrest in the country. Thus a step toward a successful debt restructuring and a new agreement with the IMF. The rise should be seen in the light of the stock market is still down 62% in USD during 2022.
Most of the emerging markets ended in the red during the month. We remain in a climate where further interest rate hikes are expected to curb inflation and mitigate weaker currencies. During the month, five of our countries raised their key interest rates: Pakistan (+1.5pp to 13.75%), Egypt (+2pp to 11.75%), the Philippines (0.25pp to 2.25%), Nigeria (+1.5pp to 13%) and Bangladesh (0.25pp to 5% – repo-rate).
Nigeria rose 3% during May. Rising commodity prices have trumped the problems of rising inflation. The stock market, which in principle is completely abandoned by foreign investors after a long period of currency restrictions, has so far this year risen 17%.
The Egyptian stock market had a hard time, and Russia’s invasion of Ukraine continues to negatively affect the country’s access to wheat. Egypt is one of the world’s largest importers and Ukraine has historically been an important source of imports. Now, the country is looking for alternative suppliers, including India (which has indicated that it can make exceptions to its export ban). The central bank’s sharp rate hike signals that the country continues to suffer in the current climate.
Pakistan fell 11% due to continued political, and thus economic, uncertainty. The new coalition government, led by PML-N’s Shehbaz Sharif, since its takeover on April 11th appeared indecisive. There have been two camps in the market. One camp has expected that the new government plans to rule until the general elections in 2023 and would take relatively immediately hard economic measures that pave the way for continued economic support from the IMF. The second camp has been expecting that the new government would announce early elections relatively immediately, and the technocratic transitional government would then be able to take the hard economic decisions at no political cost. Former Prime Minister Imran Khan’s sharp rise in popularity after he was ousted has likely made it difficult to decide between these two paths. An early election could mean that Imran Khan’s PTI gains a majority.
At the same time, hard economic decisions, in particular, the abolition of the fuel subsidies that Khan introduced at the end of his term, are politically sensitive and likely to increase support for Khan and PTI even further. In addition, the situation is further complicated by the rather sensitive arrangement of the current coalition, which consists of a right-wing party (PML-N), a left-wing party (PPP), and various defectors – whose reason for changing sides was probably partly the difficult economic situation and how it this affected the population. On May 27th, however, the government decided, somewhat unexpectedly, to raise the price of fuel sharply, and on June 2nd, another increase was announced. We welcome the decision, as it lowers the near-term risks of a Sri Lankan-style disaster. The decision indicates that the government will attempt to complete its term. The market’s muted reaction comes against the background of the risks of continued protests from the opposition and probably also some uncertainty as to whether it is possible to pursue a responsible economic policy and at the same time hold together a rather fragile coalition with various ideological backgrounds.
Global stock markets are in a fragile state where we should see falling profit estimates in most markets against the backdrop of rising borrowing costs and higher input costs. The risks to the world economy and individual countries are obvious. How this will be reflected in equity markets from here is less obvious. Equity markets performance will be about exactly how pessimistic investors in each market are, i.e. to what extent they have already acted (sold) per a negative scenario. We have regularly shown a table of current valuations vs. historical valuations in our key markets and comparisons with the US and the rest of the world. It can be a good exercise to refresh current valuations vs historic, as a gauge of sentiment across equity markets.
ABOUT THE FUND
Tundra Sustainable Frontier Fund focuses on the next generation of emerging markets such as Vietnam, Bangladesh, Sri Lanka, Pakistan, Egypt and Nigeria. Featuring strong population growth, rapid urbanisation, investments in infrastructure, growing middle classes and stabilising political environments, a vast majority of international investors are yet to discover these markets.
The fund is managed according to Tundra’s active stock picking philosophy and backed by local research offices in Asia. Investments are based on an ESG approach where each investment has to comply with the UN Global Compact with regards to human rights, labour rights, corporate governance and environmental impacts. The fund is registered in Sweden and is fully UCITS compliant. Read more about latest developments.
