Global Emerging Market Equities, Propitious Research

Wium Malan, CFA

Global Emerging Market Equities

Independent, Fundamental Quantitative Research

Propitious Research

Fully independent, fundamental and quantitative equity research, focused on companies in the Telecommunication, Media, Technology, Internet and Healthcare sectors in the Global Emerging Markets. Idea generation focused on Quality stocks, trading below their intrinsic Value, with sound Corporate Governance.

Quantitative Analysis

<ul>
<li>The 200 largest weighted companies in the GEM index reported average EPS growth of +14.2%y/y for 4Q22-to-date, slightly down from the +15.7% reported for 3Q22.</li>
<li>Only 54% of companies delivered positive sales surprises, and only 49% delivered positive EPS surprises, significantly down from the trend seen over the past 2 years.</li>
<li>Historically, there has been a significant difference in relative share price performance between the largest positive versus negative surprise generators, for 3 months after the reporting date.</li>
</ul>


The 200 largest weighted companies in the GEM index reported average EPS growth of +14.2%y/y for 4Q22-to-date, slightly down from the +15.7% reported for 3Q22.
Only 54% of companies delivered positive sales surprises, and only 49% delivered positive EPS surprises, significantly down from the trend seen over the past 2 years.
Historically, there has been a significant difference in relative share price performance between the largest positive versus negative surprise generators, for 3 months after the reporting date.


Global Emerging Markets: Reporting Season Summary, 4Q2022

Asset Allocation & Fund Positioning, Copley Fund Research

Steven Holden

Asset Allocation & Fund Positioning

Copley Fund Research

Copley Fund Research provide research and data on asset allocation among Global and Emerging Market equity funds.  The analysis details absolute and relative positioning across countries, sectors and industries together with highly granular data on single stock and single fund allocations.  The data is updated monthly with time series going back to January 2011.

Global Research - Analysis of 165 prominent Global equity funds, combined AUM $335bn
GEM Research - Analysis of 127 prominent global EM equity funds, combined AUM $250bn

Asset Allocation - Global and GEM Equity

Cross Asset Strategy

<ul>
<li>Saudi Arabia overtakes China is the largest country underweight among EM active investors.</li>
<li>Despite exposure among active managers reaching all-time highs and new funds entering the market, index weights are outpacing active increases.</li>
<li>Nearly 3/4 of the 246 funds in our analysis are still without Saudi Arabia exposure. In our view, the rising ownership trend has a long way to run.</li>
</ul>


Saudi Arabia overtakes China is the largest country underweight among EM active investors.
Despite exposure among active managers reaching all-time highs and new funds entering the market, index weights are outpacing active increases.
Nearly 3/4 of the 246 funds in our analysis are still without Saudi Arabia exposure. In our view, the rising ownership trend has a long way to run.


Saudi Arabia:  Takes Underweight Crown from China

Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Asia’s Additional Tier 1 (AT1) bonds outperformed Tier 2 and Senior Unsecured securities, despite rather constrained credit risk sentiment. In rate markets, US Treasury curve steepening roared back. Concurrently, interest rate futures rose considerably on even higher federal stimulus expectations. Rate markets may be over-pricing the potential for a "True Blue-Sweep". The risk at this point is an effectively split ticket in which Senate Republicans, aided by conservative-Democrats, water-down federal stimulus bills. Treasury yields may gap down as a result. Bank valuations could follow. The sell-off in US Treasuries was not met with increased buying in Emerging Market (EM) or High Yield (HY) markets. EM investors were more focused on early 2021 fund flows while risk-free rates rise. HY investors contemplated the potential for higher default rates over the next year. An unsynchronized global economic recovery will make single name selection more important over the near term.Asia’s HY markets slightly outperformed the US’ as both indexes tightened slightly during the week. The relative outperformance of Asia versus the US resulted in slight spread compression between the two indexes, although the remain wide of last year’s average and this years’ tights.EM capital inflows and US dollar index levels were essentially unchanged during the week despite yuan appreciation. China’s yuan hit the strongest level against the US$ since 2018. As the week closed, a spokeswoman from China’s State Administration of Foreign Exchange suggested an official tolerance of the higher currency level. Lower US-China tensions under a Biden administration could push the yuan even stronger. This may be beneficial for regional banking systems.Financial institutions issued over US$14 billion in USD and Euros. Amongst Asia-headquartered banks, the <a href="https://www.smartkarma.com/entities/sumitomo-mitsui-financial-group-inc" target="_blank" data-smartkarma-citation="entities:217:1" rel="noopener">Sumitomo Mitsui Financial Group (8316 JP)</a> and <a href="https://www.smartkarma.com/entities/kb-capital-co-ltd" target="_blank" data-smartkarma-citation="entities:3646:1" rel="noopener">KB Capital (021960 KS)</a> were the only financial institutions to access global capital market during the week. The <a href="https://www.smartkarma.com/entities/fbn-holdings-plc" target="_blank" data-smartkarma-citation="entities:27846:1" rel="noopener">First Bank of Nigeria (FBNH NL)</a> brought a five-year note with an 8.625% coupon for Frontier Market investors. Meanwhile, oversubscription  in the Investment Corporation of Dubai’s note suggests positive investor sentiment towards Dubai, which should be supportive for the <a href="https://www.smartkarma.com/entities/commercial-bank-of-dubai" target="_blank" data-smartkarma-citation="entities:29706:1" rel="noopener">Commercial Bank of Dubai's (CBD UH)</a> recently issued AT1 bond. For our thoughts on this security, please see: <a href="https://www.smartkarma.com/insights/commercial-bank-of-dubai-vs-bank-of-east-asia-a-tale-of-two-at1s-in-covid-19-uncertainty" target="_blank" data-smartkarma-citation="insights:44387" rel="noopener">Commercial Bank of Dubai Vs Bank of East Asia: A Tale of Two AT1s in COVID-19 Uncertainty</a>.   In terms of Q3 earnings, Thai banks reported mixed results and, despite missing expectations, <a href="https://www.smartkarma.com/entities/bangkok-bank-public-co-ltd" target="_blank" data-smartkarma-citation="entities:213:1" rel="noopener">Bangkok Bank's (BBL TB)</a> notes outperformed other Thai Bank bonds, all of which, also tightened week-on-week. For our thoughts on Bangkok Bank and Thai banks more broadly, please see <a href="https://www.smartkarma.com/insights/bangkok-bank-s-new-at1-overweight-on-relative-value" target="_blank" data-smartkarma-citation="insights:43402" rel="noopener">Bangkok Bank’s New AT1 – Overweight on Relative Value</a> and <a href="https://www.smartkarma.com/insights/thai-bank-capital-and-chronic-covid-19-sensitivity" target="_blank" data-smartkarma-citation="insights:44011" rel="noopener">Thai Bank Capital and Chronic COVID-19 Sensitivity</a>, respectively. As the week closed, <a href="https://www.smartkarma.com/entities/yes-bank-ltd" target="_blank" data-smartkarma-citation="entities:767:1" rel="noopener">Yes Bank (YES IN)</a> reported second quarter, to September, results which beat expectations. The bank managed to generate a profit, versus expectations of another loss, on positive operating jaws as interest and operating expense declines offset lower operating revenues. The bank reported a Common Equity Tier 1 ratio above its minimum requirement for the first time in one year following its capital raise in July and after incorporating the Reserve Bank of India’s recent asset risk-weight reductions. Yes Bank’s results should be positive for its 2023 US$-maturity note.Market Outlook: U.S. Treasury market moves this week suggest that the risk is now election outcome driven. The question is whether Democrats will truly sweep the Senate, House, and Presidency. Effectively conservative-Democrats could water-down federal stimulus efforts. At the same time, although stimulus may be positive for US risk assets, higher long-term rates may not be EM friendly. However, a rise in long-term rates may be tempered by the return of US Treasuries as a favored carry-trade option and by more targeted Federal Reserve asset purchase program operations. Eventual reflation is bank credit and equity positive, getting to reflation is not.

Asia’s Additional Tier 1 (AT1) bonds outperformed Tier 2 and Senior Unsecured securities, despite rather constrained credit risk sentiment. In rate markets, US Treasury curve steepening roared back. Concurrently, interest rate futures rose considerably on even higher federal stimulus expectations. Rate markets may be over-pricing the potential for a "True Blue-Sweep". The risk at this point is an effectively split ticket in which Senate Republicans, aided by conservative-Democrats, water-down federal stimulus bills. Treasury yields may gap down as a result. Bank valuations could follow. The sell-off in US Treasuries was not met with increased buying in Emerging Market (EM) or High Yield (HY) markets. EM investors were more focused on early 2021 fund flows while risk-free rates rise. HY investors contemplated the potential for higher default rates over the next year. An unsynchronized global economic recovery will make single name selection more important over the near term.Asia’s HY markets slightly outperformed the US’ as both indexes tightened slightly during the week. The relative outperformance of Asia versus the US resulted in slight spread compression between the two indexes, although the remain wide of last year’s average and this years’ tights.EM capital inflows and US dollar index levels were essentially unchanged during the week despite yuan appreciation. China’s yuan hit the strongest level against the US$ since 2018. As the week closed, a spokeswoman from China’s State Administration of Foreign Exchange suggested an official tolerance of the higher currency level. Lower US-China tensions under a Biden administration could push the yuan even stronger. This may be beneficial for regional banking systems.Financial institutions issued over US$14 billion in USD and Euros. Amongst Asia-headquartered banks, the Sumitomo Mitsui Financial Group (8316 JP) and KB Capital (021960 KS) were the only financial institutions to access global capital market during the week. The First Bank of Nigeria (FBNH NL) brought a five-year note with an 8.625% coupon for Frontier Market investors. Meanwhile, oversubscription  in the Investment Corporation of Dubai’s note suggests positive investor sentiment towards Dubai, which should be supportive for the Commercial Bank of Dubai's (CBD UH) recently issued AT1 bond. For our thoughts on this security, please see: Commercial Bank of Dubai Vs Bank of East Asia: A Tale of Two AT1s in COVID-19 Uncertainty.   In terms of Q3 earnings, Thai banks reported mixed results and, despite missing expectations, Bangkok Bank's (BBL TB) notes outperformed other Thai Bank bonds, all of which, also tightened week-on-week. For our thoughts on Bangkok Bank and Thai banks more broadly, please see Bangkok Bank’s New AT1 – Overweight on Relative Value and Thai Bank Capital and Chronic COVID-19 Sensitivity, respectively. As the week closed, Yes Bank (YES IN) reported second quarter, to September, results which beat expectations. The bank managed to generate a profit, versus expectations of another loss, on positive operating jaws as interest and operating expense declines offset lower operating revenues. The bank reported a Common Equity Tier 1 ratio above its minimum requirement for the first time in one year following its capital raise in July and after incorporating the Reserve Bank of India’s recent asset risk-weight reductions. Yes Bank’s results should be positive for its 2023 US$-maturity note.Market Outlook: U.S. Treasury market moves this week suggest that the risk is now election outcome driven. The question is whether Democrats will truly sweep the Senate, House, and Presidency. Effectively conservative-Democrats could water-down federal stimulus efforts. At the same time, although stimulus may be positive for US risk assets, higher long-term rates may not be EM friendly. However, a rise in long-term rates may be tempered by the return of US Treasuries as a favored carry-trade option and by more targeted Federal Reserve asset purchase program operations. Eventual reflation is bank credit and equity positive, getting to reflation is not.

Bank Credit Weekly: Election Risk Rises as Asia’s AT1s Outperform

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

Saudi Arabian banks <a href="https://www.smartkarma.com/entities/national-commercial-bank" target="_blank" data-smartkarma-citation="entities:24696:1" rel="noopener">National Commercial Bank (NCB AB)</a> and <a href="https://www.smartkarma.com/entities/samba-financial-group" target="_blank" data-smartkarma-citation="entities:27892:1" rel="noopener">Samba Financial Group (SAMBA AB)</a><a href="https://www.tadawul.com.sa/Resources/fsPdf/7588_345_2020-06-25_16-05-12_en.pdf" target="_blank" rel="noopener">announced</a> they had entered into a "Framework Agreement" on 25th June 2020 in order to begin "a reciprocal due diligence process and to negotiate definitive and binding terms of a potential merger" between the two entities.The two parties have also agreed on an Exchange Ratio Range on a non-binding basis. Based on the outcome of the due diligence process, the shareholders of Samba will receive between 0.736 and 0.787 newly issued share of National Commercial Bank in exchange for every share they hold in Samba. Right now, given the dividend differential, this is trading roughly at the lower end of terms.This is an exploratory insight. It is a big deal, and may be politically important in terms of the Vision 2030 plan. It looks like Samba might be getting the short end of the stick, but better bank analysts than I should probably take a look. That does not mean there aren't interesting things to look at here.

Saudi Arabian banks National Commercial Bank (NCB AB) and Samba Financial Group (SAMBA AB)announced they had entered into a "Framework Agreement" on 25th June 2020 in order to begin "a reciprocal due diligence process and to negotiate definitive and binding terms of a potential merger" between the two entities.The two parties have also agreed on an Exchange Ratio Range on a non-binding basis. Based on the outcome of the due diligence process, the shareholders of Samba will receive between 0.736 and 0.787 newly issued share of National Commercial Bank in exchange for every share they hold in Samba. Right now, given the dividend differential, this is trading roughly at the lower end of terms.This is an exploratory insight. It is a big deal, and may be politically important in terms of the Vision 2030 plan. It looks like Samba might be getting the short end of the stick, but better bank analysts than I should probably take a look. That does not mean there aren't interesting things to look at here. 

Debt Capital Markets

China Construction Bank  / Debt Capital Markets

<a href="https://www.smartkarma.com/entities/china-construction-bank-corp" target="_blank" data-smartkarma-citation="entities:24567:1" rel="noopener">China Construction Bank's (CCB)</a> prospective new issue Tier 2 bond is likely to price very close to its existing 2024 callable Tier 2 bond. A flat credit curve, favorable Tier 2 supply technicals and the crowding-in of investor demand for almost anything with a coupon could make this a good deal for the issuer. We hope we are wrong.We see fair value for a potential ten-year, non-call five-year, Tier 2 bond from China Construction Bank at the comparable five-year treasury benchmark plus 195 basis points (T+195). CCB’s 2029 maturity Tier 2 bond with first call in 2024 currently trades at approximately T+185.  Downside risk could be limited, but investors may need to look elsewhere for more pure spread or better upside potential.

China Construction Bank's (CCB) prospective new issue Tier 2 bond is likely to price very close to its existing 2024 callable Tier 2 bond. A flat credit curve, favorable Tier 2 supply technicals and the crowding-in of investor demand for almost anything with a coupon could make this a good deal for the issuer. We hope we are wrong.We see fair value for a potential ten-year, non-call five-year, Tier 2 bond from China Construction Bank at the comparable five-year treasury benchmark plus 195 basis points (T+195). CCB’s 2029 maturity Tier 2 bond with first call in 2024 currently trades at approximately T+185.  Downside risk could be limited, but investors may need to look elsewhere for more pure spread or better upside potential. 

China Construction Bank: Prospective 10nc5 Tier 2 Bond Is Likely to Be Good Value for the Issuer

Saudi Arabia

Riyad Bank attracts deposits and offers commercial and retail banking services. The Bank offers automobile and other consumer, business, and syndicated loans, private banking services, risk analysis, trade finance, asset management, and treasury services, sponsors Visa credit cards, and manages mutual funds.

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Riyad Bank (RIBL AB)

Global Emerging Markets: Reporting Season Summary, 4Q2022

In this quarterly insight, we analyse recent GEM reporting trends with reference to Sales and EPS growth, size and percentage of positive...

Wium Malan, CFA

Saudi Arabia: Takes Underweight Crown from China

Saudi Arabia overtakes China is the largest country underweight among EM active investors. Despite exposure among managers reaching all-time...

Steven Holden

Bank Credit Weekly: Election Risk Rises as Asia’s AT1s Outperform

A must-read on US$-risk sentiment derived from high yield and equity markets, interest rates, dollar levels, capital flows and issuance to frame...

Hank Calenti, CFA

Doing the Big Bank Samba in KSA

Saudi Arabian banks National Commercial Bank (NCB AB) and Samba Financial Group (SAMBA AB)announced they had entered into a "Framework Agreement"...

Travis Lundy

China Construction Bank: Prospective 10nc5 Tier 2 Bond Is Likely to Be Good Value for the Issuer

China Construction Bank's (CCB) prospective new issue Tier 2 bond is likely to price very close to its existing 2024 callable Tier 2 bond. A flat...

Hank Calenti, CFA

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