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London-based Ashmore Group PLC and other emerging market fund managers face further hits to earnings and worsening outflows as investors retreat over concerns about higher interest rates, the war in Ukraine and exposure to China.
This year will be tougher for most investment managers as markets become more uncertain, say analysts at Bank of America Corp. The U.S. bank has slashed its earnings per share forecast for Ashmore by 6 to 9 per cent for the first quarter of 2022, and expects assets under management (AUM) to fall a further 11 per cent — among the heaviest projected drops for U.K. managers surveyed by BoA.
Other leading investors with sizeable emerging market investments such as Abrdn PLC, Schroders PLC and Man Group PLC are also exposed to these pressures. However, these managers are more diversified businesses than Ashmore, and less concentrated on emerging market debt.
“Emerging market debt saw outflows, not only for Ashmore but across the industry this quarter, which shouldn’t be a big surprise given higher U.S. interest rates, higher rate expectations, strong U.S. dollar and the Russia-Ukraine conflict,” says Hubert Lam, analyst at BofA.
“For Ashmore it’s a mixture of the sector falling out of favour because of the conflict and higher interest expectations, but also due to the mixed performance of their strategies,” he adds.
Ashmore, an emerging market specialist with US$87.3-billion in AUM, had placed sizeable bets on Russian assets in the weeks leading up to President Vladimir Putin’s invasion of Ukraine in late February. It also holds about US$500-million in debt exposure to embattled Chinese property developer China Evergrande Group, according to Bloomberg LP.
Foreign investors withdrew US$11.2-billion from Chinese bonds and US$6.3-billion from Chinese equities in March, according to the Institute of International Finance (IIF), making Chinese markets responsible for almost all the US$9.8-billion in net emerging market outflows during the month – the first net outflow figure for a year. Other emerging markets recorded equity outflows of US$400-million and debt inflows of US$8.2-billion.
FTSE 250 Index-listed Ashmore reported a US$3.2-billion fall in AUM in the second half of last year, and its share price has fallen more than two-fifths over a one-year period to April 7. Its high-yield debt investments performed significantly below benchmark in 2021.
Ashmore declined to comment.
“The business model copes with these kinds of business cycles in emerging markets, and we’ve been through a number of them,” Tom Shippey, group finance director, told the Financial Times in February.
“We are an investor in China Evergrande, we continue to follow that situation very closely. ... If the [investment committee] continues to have a position in a security, whether China Evergrande or any other, then the view of the committee is there is value still to be harvested,” he added at the time.
Evergrande is embarking on a restructuring process after defaulting last year, shaking China’s real estate sector and contributing to an economic slowdown in the country.
Abrdn has significant exposure to emerging markets in Asia, although its concentration in more stable equities markets has tempered the impact. BofA predicts outflows will average 4 per cent this quarter, continuing a multiyear trend at the company, while the FTSE 100-listed group’s share price has fallen by about a third over the past 12 months.
“Both Abrdn and Ashmore were exposed to Evergrande, and that would have impacted their performance. Fund performance has been mixed, but some of the categories in which they’ve underperformed are in corporate debt and high yield, and these are the areas in which they would’ve been exposed to the Chinese property sector,” Mr. Lam says.
Edmund Goh, head of China fixed income at Abrdn, noted concerns over “fallout from the giant property sector, where several developers have defaulted.”
He adds, “We do think U.S. dollar Chinese bonds are still attractive to investors especially after recent market correction.
“It’s true that the scale of distress amongst private property developers have surprised many investors but we think there’s little need for the current Chinese government to continue tightening policies anymore,” Mr. Goh says. “We believe that some selected names are still worth considering as they are trading at very steep discounts.”
While other players such as Schroders and Man Group are also exposed to emerging market risks, the impact is less apparent because it is a smaller proportion of their business.
The IIF says Chinese markets had received steady inflows in recent years as foreign investors built their exposure, despite China-specific shocks such as U.S. trade tariffs and the early stages of the COVID-19 crisis.
“However, this month our tracker shows an important outflow episode hitting China the hardest,” it says, adding that “this is an unprecedented dynamic that suggests a market rotation.”
Latin America gained the most in March, with net inflows of US$10.8-billion in the month split roughly equally between equities and debt. Rising commodity prices and low valuations have drawn investors to commodity exporters such as Brazil.
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