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Stephen Rudman: Good morning and good afternoon. My name is Stephen Rudman, and I'm a member of the Ashmore New York City-based client team. Welcome and thank you for joining this Ashmore webinar titled: "Volatility creates opportunity: Emerging Market stock opportunities in turbulent times". This webinar is for investment professionals only, and not open to members of the media or individual investors. We will address questions at the end of the session, which should run about 30 minutes.

Today's speakers are Dhiren Shah, Lead Portfolio Manager of Ashmore's EM Equity Fund, and Gustavo Medeiros, our Global Head of Research. Today's goal is to discuss the opportunities they believe have been created by the volatility we have seen over 2022, and they will share some thoughts on why we have optimism moving forward. With that, I will turn it over to Gus.

Gustavo Medeiros: Thanks, Stephen, for the introduction. It is a great pleasure to have Dhiren here to discuss and debate the importance of the bottom-up process during what is a very challenging environment. So let me start with this very challenging environment from a global macro perspective, Dhiren. Traditionally, a ‘top-down’ portfolio manager like me would think of it favouring defensives over cyclicals. How does that translate into your bottom-up process?

Dhiren Shah: Thanks, Gus. Let me start by explaining that we are primarily bottom-up driven, which is around 70% of what we do. But we do overlay that with macro insights. But we don't apply a top-down lens and say we're in a negative environment, so we're going to sell all kinds of cyclicals and buy defensives. Our approach is more iterative from the bottom-up, and it's based on the fundamentals that we see forecast at a bottom-up level, which then feeds into individual stock ratings and conviction.

Looking back to the beginning of the year, we were first seeing signs of a more difficult backdrop. What this meant was our forecasts and our conviction on parts of the technology sector, hardware, semiconductors faded, so we began reducing exposure there. But it wasn't an automatic response to simply sell all cyclicals and buy defensives. There are areas, such as financials, which are typically domestically cyclical, which we actually added exposure to. Obviously, there’s a favourable interest rate cycle, which is positive for those quality financial names that have strong liability franchises they were not being paid for in the past 10 years when rates have been low. Suddenly, these financials have the opportunity to generate substantially higher margins.

But overall, we've increased exposure to those consumer staples and areas such as healthcare where companies retain the ability to grow their revenues. Some of these companies that had margin pressure in prior years are seeing those higher costs fading away, and we've got the opportunity to buy these companies now at attractive valuations. One area that we haven't add anything to is telcos, typically a defensive sector, just because we see very limited growth, and it doesn't really fit our process.

Gustavo Medeiros: Very good. Let me change topics a little bit. One of the key events to date has been China’s zero-COVID policy strategy, which has really rattled the Chinese markets. What has been the impact to companies over there?

Dhiren Shah: Yes, it's been a very difficult backdrop as China's followed its ideological approach of focusing on developing domestic mRNA vaccines as opposed to importing them. The consequence, as we all know, has been the stop-start economy, which has made the operating environment for businesses much more challenging. Companies are still growing, which is very important to highlight, they're just not growing as fast as they typically would be. And as this has been a more prolonged sub-par growth environment for them, we're seeing companies take actions on costs and doing what good companies do.

What we’ve been finding is an environment where the good businesses are growing 5% to 10% lower than where they normally would be, but they're growing and doing interesting things on the cost side. Valuations are now sometimes touching multi-year lows.

This means there's a very compelling environment for such companies, but we still see growth as being sub-par. So, the question we ask ourselves is, although we've got these attractive valuations, when will this translate into that multiple expansion or realisation of value?

One of the things we think about China as the world’s second-largest economy, is it sensible to forecast that in two years’ time, the rest of the world will be in a post-COVID environment, while China is still enforcing its zero-COVID policy? We see the probability of that being very low. Therefore, the question really is at what point will China get away from this policy, and how will it happen? We spend a lot of time understanding the different variables, especially in terms of China developing its own mRNA vaccines and its capacity to vaccinate its population, along with others. The exact timing of this is difficult to forecast, but we expect news flow to change over the coming year as we get closer to that reopening, and we think this could then be a really powerful environment for the stock market. As we know, the market was exuberant in China 12-18 months ago, but since then a lot of people have given up a lot of value. There are a lot of great companies that we like, that we know the wider market likes, and today you’ve got a fantastic opportunity to buy there. So, we like China because we like what companies are doing and we know the franchises, but while we do see a more challenging near-term environment, we've still only got scope to add more.

Gustavo Medeiros: Very good. And as we're discussing China, we saw about 12-18 months ago, the emergence of a highly pressurised regulatory environment, and in the tax sector specifically. What has this meant for our investments in the Chinese technology space?

Dhiren Shah: If you go back to our long-term history, we haven't been an investor with a  persistently positive view on China tech. So, as we went into this regulatory reset – the much tougher regulatory environment last year – we were actually underweight to Chinese tech and that was primarily based on valuations. Despite the collection of great Chinese tech companies, we felt the valuations were expensive. As events unfolded, our views on tougher regulation was that this was a cyclical problem, and not structural in nature.

Technology is a critical part to China doing well in the long term, and Chinese officials at times forget this but then they'll remember this again. So, we expected these regulatory pressures to abate, and over time this regulatory pressure has indeed reduced. So, for us this is no longer a significant concern.

But as the Chinese stock market has sold off, we've increased our exposure across a range of companies in China, which we think are very well placed for the cost-based reasons already mentioned. And part of the positive consequence of this regulatory pressure is a risk of less competition across companies, across verticals, meaning individual verticals and companies that operate within them will in time emerge stronger. Therefore, we now have a strong positive view on the tech sector, which hadn’t been the case for several years, and we’re now expecting some significant returns over time from that space.

Gustavo Medeiros: Very good. Related to this topic, last week the US unveiled a US CHIPS Act, which is driving another wedge in the semiconductor ecosystem, and we’re continuing to see deglobalisation or ‘friendly shoring’ across the global economy. In your view, what's the likely impact of this US CHIPS Act and more broadly this environment on the EM investment universe?

Dhiren Shah: We think it's significant. There's the unverified list and the entity list, and the rules have been tightened around that, and there's a presumption of almost being guilty. This will make it difficult for a number of companies. How difficult? We'll find out in the coming two to three months, because there's a certain auditing requirement behind it.

We'll see which companies will no longer be supplied by firms in the US, but we think the number will be quite significant. So, this is a continuation of what we've had for the last four to five years, but it's an acceleration. China's been developing its own technology ecosystem, but there are a number of companies we have invested in which were benefiting from essentially import substitution – Chinese  companies taking share from other companies globally – and that broadly continues. We think it will benefit Korean companies in terms of the geopolitical sphere is more closely aligned to the US, so we can see less competition from some of these Chinese firms globally. That creates a competitive environment for South Korea. And in a different part of the world, Mexico’s economy hasn’t  fully capitalised on the opportunities that have been presented here, but is certainly benefiting and this could be a long-term trend. As companies get closer to the US, Mexico is the next logical step for them, so Mexico could be an underappreciated beneficiary of the US CHIPS Act.

Gustavo Medeiros: Very good. As we know, the backdrop of an economic slowdown typically goes hand-in-hand with more difficult environment for the semiconductor sector, of which we've been a fan of in the past. Is this still the case?

Dhiren Shah: Yes, we’ve had almost a super-cycle in semiconductors, so there's a longer-term trend. We tend to think of semiconductors as a new world, and I think that's very clear from what we see in terms of the geopolitical significance of semiconductors. But that cycle supercharged post-COVID, and there have been significant demand increases, and one of the consequences of a slower backdrop has been that some of that demand is being unwound and while semiconductor lead times have normalised, they're still tight.

But as we became slightly more concerned about the backdrop, as I mentioned earlier, we reduced our semiconductor exposure meaningfully, while still retaining core positions. This is because we see a number of global leaders within the semiconductor space residing in parts of Taiwan and South Korea, so that's typically where we get our exposure. Even in challenging environments, these companies have continued to grow.

So, given where we are today, after having been through significant drawdowns in semiconductors, we believe we're now one to two quarters away from the cycle potentially bottoming. And in this environment, where stocks having fallen 50%, 60%, 70% on occasions, valuations start becoming interesting. As things start to improve, we expect to see those stocks start to perform very well again, so we are looking at this space for specific opportunities.

Gustavo Medeiros: Excellent, thanks for that. Let's change tack and talk about Brazil. We’re expecting the result of the presidential election, Lula vs Bolsonaro, in a couple of weeks. Lula’s centrist approach looks the most likely winner but it’s going to be tight. Is it time to buy or sell?

Dhiren Shah: I'll give you a bit of preamble before I answer that. It’s always interesting what's priced into markets and for a while there’s been this anticipation that Lula would win, and there were significant concerns about what that would mean from a fiscal standpoint. But we got some early indications on the political tea leaves of a more centrist Lula from his vice-presidential candidate, which gave us conviction earlier this year. Still, the market had serious concerns and valuations were much lower in Brazil to add to our Brazil positions. And volatility presents some great opportunities, so we added to software providers that have been generating significant margins. These are all very profitable dominant franchises, 40%-50% share and available at a very good price.

Likewise, one of the energy stocks that we added – a leading energy producer in Brazil – presented a phenomenal opportunity. Such were the dislocations in markets, we were able to pick up a double-digit quarterly dividend yield. That was something I hadn’t seen throughout my career, and it was all funded on free cashflow, not from adding on debt. So, we took advantage of a number of opportunities and today we stand still constructive on the market. As a country, Brazil has had one of the fastest, most aggressive rate cycles, and in spite of that, GDP growth expectations have actually been revised upwards. This shows you some of the wealth effects from soft commodities.

Obviously, over time there’s going to be some rising of production, and while the economy never fully healed from the last major downturn (pre-dating COVID), there’s a natural underlying strong demand. We still see valuations as cheap, that's obviously a good starting point. The Brazilian currency is cheap and so we're very much of the view to have remained with a constructive view. We are selective in terms of reducing exposure to stocks that perform well. But in general, we still think it's a good time to be in Brazilian assets.

Gustavo Medeiros: Excellent, very good. Very much agree. Since we're talking about neutral countries, let's talk about the ultimate super winner. India has been benefiting from an increasingly multi-polar world. They're buying oil from Russia at a 30% discount, and getting Apple to invest there. India also has massive domestic structural drivers that have been sustaining decent economic growth, and it is one of the fastest growing economies globally. Policy is pretty stable and transparent, and it’s a democratic country with due process. India’s leading indicators, including PMIs (Purchasing Managers’ Indices) are doing very well. So, there’s a lot to like. Do you see India as a fertile ground for stock ideas, and stock-picking? Which industries do you like most?

Dhiren Shah: We've had a longer-term positive view on India going back some time, that has been expressed across a number of different sectors. Because it's a very deep liquid market, it’s one of the best stock-picking markets that we can find within EM.

The interesting dynamic we see from our top-down overview screens and that we see at a bottom-up level is the need to be selective because of valuations. There are some great companies in India, but we have to be very selective to ensure we have valuation discipline. In terms of macro headwinds, India is an oil importer, as you alluded to. And therefore, as oil prices go up, India is more exposed. Another concern is India’s current account deficit, and we’ve mindful of this to have conducted stress tests. We think there are no serious concerns here, but it’s something to be cognisant of. So, this notion that India can be truly insulated from the global environment is, we think, a bit of a stretch, and there is room for contagion.

We've had meaningful exposure to the financial  sectors. We have been finding some great banks taking market share from the state banks, very profitably growing 15%-20%, and performing very well. So, while investors first allocated away from China into India because of geopolitics, the switch has also been because the growth rates have been stronger, the PMIs are good, and the relative outperformances have been very stark. However, that means from a valuation standpoint stocks that have had a 50%-100% upside are now moderating. As a consequence, we’re taking down our exposure there, but we're finding some interesting opportunities on the pharma side. India has a strong comparative advantage in pharma exporting to the world, and there are some interesting opportunities there that we think will continue to play out and benefit potentially from the weaker rupee.

Gustavo Medeiros: Excellent. Since we're talking about complicated democracies, what about the uncertain dynamics in Peruvian politics over recent years? How does that impact our ability to actually do some investing and bottom-up picking in the market?

Dhiren Shah: Our macro scorecard helps to frame how significant such political risks can be Even though there has been almost uncharted political instability, looking at the numbers, and specifically Peru’s fiscal deficit, Peru scores very well. So, when you strip out the noise, the fundamentals are okay. Going back to the bottom-up view, there are some interesting opportunities there. We've not invested in Peru for some time, but we are finding some opportunities – particularly in financials, where the positive rate cycle is going to drive some significant tailwinds and margins.

Gustavo Medeiros: Very good. You mentioned earlier the number of times you use top-down as a driver for idea generation and also risk management. Can you share an example, please?

Dhiren Shah: Yes, for top-down, we've got our macros, and we've also got our quantitative process. One of the interesting markets highlighted for us by our quant process was Chile. For those who know EM investing well, Chile is known as being one of the most expensive markets. But our quant process flagged how cheap and how poor the performance has been in Chile. That caused us to spend more time meeting with companies, conducting more research and analysis. In summary, we found a lot of interesting companies with cheap valuations, but in our, there is a significant macro adjustment to come, which would still be quite difficult. So, now is not the time to start to invest in Chile, but we will be patient and wait for the better opportunity.

Gustavo Medeiros: Great, very good. One of the key parts that underpins your process is focusing on stocks with high quality and sustainable growth attributes. But we're in an environment where growth has been out of favour, year to date. Does that lead the portfolio to be vulnerable to some shifts in the market in terms of style drifts and if so, how have you been handling that recently?

Dhiren Shah: By design, we ensure that style doesn't dominate outcomes. Picking the right stocks is the largest part of our ex-ante tracking error, and determines our alpha generation. So, when we look back at 2021, value outperformed growth significantly by 12%, but we still outperformed by 8%. I think that's a good demonstration of our approach.

While this year has  clearly been more challenging, when we think about the stocks we have in our portfolio, we see them as being built for these difficult macro times. These are high quality companies with strong balance sheets that have strong pricing power. Also, being high quality, the visibility of that revenue growth is much higher because they've got stronger relationships with their customers and a better ability to control costs. These are all of the attributes you'd want companies to have in challenging and difficult times. And, after the volatility and sell-downs in markets, these companies are being priced at significant discounts and attractive valuations. Once we get a normalisation, and as these companies continue to deliver their strong results, there will be significant upside potential when some of these external headwinds abate.

Gustavo Medeiros: Excellent. There is a very important and interesting topic within ESG about supply chain risk when assessing a specific company. One example that always comes to mind is how they plan to focus on human rights. For example, human rights issues in Xinjiang have been a recurring theme over the last five years. How do you navigate these ESG-specific challenges?

Dhiren Shah: When it comes to ESG, we leverage all of resources we have here at Ashmore . We have our scorecard, which frames best practice, and it ensures we don't get caught into country-specific traps. It's a very detailed meticulous bottom-up process. If you want to do ESG well, you really need to have that detail at the bottom-up level. So, this involves screening, checks, exclusions, and it involves engagement, as steering companies to improve is a very important aspect of ESG. Companies need to hear that feedback, and this engagement can often lead to us either not being able to invest (because the standards are not where we want them to be) or we can increase the cost of capital to compensate us for those risks. It's a bottom-up process and something we naturally spend a lot of time on.

Gustavo Medeiros: Very good, and we learn a lot from that as well on the global macro level. Dhiren, thanks for your time. We started the interview mentioning that the global macro scenario is challenging, but I would like to end by asking what is the bottom-up process telling you? Is it time to buy or sell EM equities?

Dhiren Shah: The way I look at it is we have a portfolio of companies and we've had multiple contractions in markets. So as liquidity has been being sucked away, and the market's fearing the downturn, multiples contract. Emerging markets have seen multiples trading at close to historical lows. The next question is, so what's been the magnitude of the earnings contraction? When we look at our portfolio companies, we’ve obviously made changes to ensure we get that revenue stability. So, when we look at our portfolio companies today, we see meaningful upside. What that means to me is we want to have exposure. When you have a collection of great companies with a ton of upside, you invest because otherwise when the turning point does come, you potentially won't catch it, you’ll miss it. Exact timing is always difficult, so we ensure we have exposure and as things start to improve, we add more. I guess you expected me to say that.

Gustavo Medeiros: Well, I'd be disappointed if you said otherwise, but we very much agree. Thanks a lot for your time, and that pretty much wraps up what we had prepared.

Stephen Rudman: Thank you Gus. Actually, you did a good job of answering some of the questions that came through. I did have one US question which I will address, about Dhiren's fund’s capital gain distributions. Dhiren’s EM equity fund is estimated to distribute zero capital gains, not surprising in a year like this. And this is the case for the entire US 40 ACT Fund suite, which I hope addresses the question that was asked.

In response to another question just asked, I think some of our viewers may have actually already seen we have a great chart that shows the last 20 years when the MSCI has actually had a drawdown of greater than 25% post the bottom. Of course, determining the ‘bottom’ is the hard part, you’re never sure when it will happen. But the significant outperformance of the MSCI upon that rebound is roughly averaging 47% in those multiple occasions of a 25% drawdown. That is dramatically higher than developed markets if you look at developed markets MSCI Global. With that said, we recognise that it takes courage and patience to add to existing positions and keep your portfolio in play. But our experience shows over the years clearly that investors have been rewarded for putting money to work in times like this, in these types of drawdowns.

With that said, any follow up questions, feel free to reach out to your Ashmore representatives. And as always, we wish you all the best. Be safe and well, and thank you so much for your time. Feel free to share with investment professionals that you think may find this interesting.