Ashmore: a counter-intuitive and counter-inflationary play

Ashmore’s (ASHM) shares were marked up on results day even though management confirmed that assets under management (AuM) contracted due to "widespread risk aversion" in the second half of its financial year. The result was a $13.5bn (£11.7bn) net outflow from the emerging markets specialist's funds in the 12 months to June, leaving it with AuM of $64bn. Matters weren’t helped by a negative investment performance amounting to $16.6bn and statutory profits were constrained through the second half due to a £49.9mn unrealised mark-to-market loss on seed capital investments. Earnings came up short of consensus expectations as the group incurred a £61.3mn loss on investment securities, compared with a profit of £123.5mn a year earlier.

It makes for unpleasant reading, but few investors would be surprised given the litany of problems faced by the global economy. Some of the bad news was foreshadowed in a recent fourth-quarter update that contributed to the one-third dip in the share price in the year-to-date, but all things considered a 10 per cent reduction in net management fees isn’t such a dire outcome for the investment manager.

Unfortunately, conditions in this corner of the market are likely to get worse before they get better, even if trade routes from the Far East unclog through the remainder of 2022. That’s because the US Federal Reserve has no intention of abandoning its hawkish stance on interest rates. An increase in the cost of servicing US dollar-denominated debt usually spells trouble for emerging markets, as it generally weakens the value of other currencies against the dollar, precipitating an outflow of investment capital.

But effects are far from uniform. Emerging market economies that run persistent trade deficits financed with dollar-denominated debt are more vulnerable to interest rate hikes, although some central banks outside the US anticipated the actions of the Federal Reserve well in advance and started to crank-up their base rates. Whether this indicates that the impact of rising US interest rates will not be as severe for emerging market economies this time around is difficult to gauge, but we can say that the likely duration of the current malaise gives as much cause for concern.

Mark Coombs, Ashmore’s founder and chief executive, takes a resolutely glass half-full position, as one might expect: “While the global macro environment still presents some near-term uncertainty, the situation in emerging markets is improving and the breadth of investment opportunity helps to mitigate the risks”.

Hope springs eternal, but his confidence probably isn’t misplaced over the long term, particularly when you factor absolute and relative valuations and the heavy discounts on offer. Admittedly, the MSCI Emerging Markets index has underperformed relative to the MSCI World index over the past 12 months, but recent analysis carried out by UBS investment strategist Xingchen Yu indicates that of the 50 per cent of the index constituents that have already posted second-quarter results, “revenue and earnings have been strong, both showing mid- to high-teens year-over-year growth rates”. He goes on to point out that “companies have beaten consensus estimates by close to 10 percentage points on earnings growth, and more than half have beaten earnings estimates, far more than the 30 per cent that missed them”.

Beyond specific near-term factors, Ashmore’s second-half performance simply reflects the fact that volatility and risk are generally higher in emerging markets, a corollary to assumptions on the superior growth rates on offer. The trouble is that we often concentrate too much on China whenever we think of prospects for these types of economies, although that probably reflects the weightings given over to its index stocks. However, it’s worth remembering that a resource-rich country such as Brazil will fare differently to an economy largely reliant on its manufacturing base.

That last point partly explains why China took a disproportionate hit when Covid-19 restrictions were in place, as many companies ceased production altogether once social contact in the workplace was curtailed. The People’s Republic has taken a harder line on the virus than many other countries, which is problematic when a quarter of your gross domestic product is linked to manufacturing. It’s also a problem for the rest of us given that the country accounts for around 40 per cent of global container traffic. Recent events in Shanghai may have reinforced the notion that western economies would be well advised to reshore industrial production and truncate supply chains, although given our interdependency it would be analogous to turning a super tanker around.

Ashmore is one of our long-term buys and based on the strength of its balance sheet, an implied dividend yield in advance of 8 per cent and an enterprise/cash profit multiple of 3.7 (against a five-year average of 10.9), we think the current rating is compelling, even given the bumpy road ahead.

Last IC View: Buy, 282p, 10 Feb 2022