Stewart McAndie: Good morning, good afternoon. I'm Stewart McAndie, a member of the Ashmore UK Intermediary Client team. Welcome, everyone, and thank you for joining Ashmore's webinar: 'Smaller EM and Frontier Markets - Opportunities Beyond Trump'. 

Today, we are joined by Andy Brudenell, Head of Frontier Equity at Ashmore. Welcome, Andy. With Trump in the title of the webinar, we can't ignore the tariffs, and we'd like to start by getting a comment from you on that. Can you give us some high-level thoughts and potential impacts of tariffs on your market should there be US protectionism be sustained, Andy?

Andy Brudenell: Yes, thanks, Stewart. Yes, absolutely. It's something everyone's talking about, it's grabbing the headlines. It is somewhat unclear as to what's coming and what's actually going to stick around, as you say. It would be disingenuous of me to say that this isn't a smaller emerging frontier market problem, but I think it is a little different for these markets and I think people can feel a little bit happier relative to other parts of the world. 

Generally speaking, frontier markets are less connected and they're less correlated with the world. They are not the big drivers of global trade. There tend to be much more domestic-focused opportunities within these markets. And people who've heard me speak before, will know that I do talk about that an awful lot. But having said that, of course, there will be certain markets and governments watching closely to see how it pans out. 

One of the more obvious ones people might be thinking of in this world would be Vietnam. It does have quite a large surplus with the US, and therefore I'm sure at some point, there will be conversations had between the two governments and various representatives, and there's certainly some worry about what that might lead to. It's been under scrutiny from a currency point of view as well in the past.

But in fact, the last time Trump won, what actually ended up happening was that things worked out quite well for Vietnam in terms of bringing lots of friend-shoring and foreign direct investment (FDI) as a result of that. There was a lot of China Plus One policies where you ended up with many manufacturers realising they needed to do more to open up elsewhere and Vietnam was considered, as we say, a friendly option for that. 

So, there was a lot of investment and spending there, which ended up driving a lot of FDI over the years, which continues to today. This would suggest a scenario where Vietnam may still be considered part of the solution, but my guess is that it won't be quite as rosy and clear-cut as that. Our portfolio is positioned to be aware of possible positive and negative outcomes, but generally in the medium term, we still believe – for other reasons we'll probably speak about later on, that Vietnam's a pretty good place to be investing, but we are positioned to really be adding to Vietnam on any sort of weakness or worry about that headline that may well appear as we've seen happen to other countries, be it Mexico, Canada, etc. 

In other parts of the market, there's many markets like the Philippines and others are generally importers from the States and don't have this quite scary trade gap. They're not really considered to be the big threats of the administration of the US. The GCC region, again, pretty much, imports most things generally and imports a lot from the US. Energy, obviously, fossil fuels are a different sort of category entirely in terms of these tariff conversations. So overall, relative to other investments, whether it's other developed market investments that our clients might have or the larger emerging markets, I think these smaller frontier markets are actually not too badly positioned to weather the storm from tariffs.

Stewart McAndie: Thank you for that. Can we talk a little bit more about what might be more of a positive shock in terms of the Ukraine-Russia situation and any sort of resolution there?

Andy Brudenell: I think there is a feeling that there will be some sort of resolution there and obviously we don't really know exactly how that's going to pan out. But if there can be a resolution there, or indeed, how things may play out in Syria or Gaza, or rebuilding plans for Lebanon, which I've already seen some headlines on. All of these unfortunate conflict zones, generally are in areas looking for help from corporates in countries that tend to be within our investible universe. So, be that obviously Ukraine itself reviving and that economy turning around. The likes of markets say, like Romania, may be less scrutiny post some sort of ceasefire and rebuild in Ukraine, perhaps might be Kazakhstan may benefit from that. And then in, as I say, in the Lavant and Middle Eastern region, it may well be that some of these GCC markets will be part of the process of rebuild and reconnecting economic ties. So, if there are going to be corporations and countries that benefit, I think it's still pretty clear that there'll be a good number of those within the investible universe of this fund. 

You know, is it possible in terms of other implications, I mean India and China have benefited from opportunities to get oil at slightly discounted prices, maybe that goes away a little bit, so maybe less good for them, but obviously that's not part of our investible universe. So overall, again, net-net, that could be quite a good opportunity. Not really the base case for the fund at the moment. But yes, there are a number of things that we're looking at in various countries, be it Romania, Kazakhstan, maybe some sort of smaller Turkish businesses, Poland, etc.

Stewart McAndie: Thank you. Can we focus on what would attract investors to frontier markets? We've mentioned the scope of Trump and China volatility, which we'll come onto, but can you give the audience more of a feel for the domestic growth opportunities and some idiosyncratic opportunities within this market?

Andy Brudenell: Yes, I think there's a lot here and really the definition of a smaller emerging or frontier market to my mind is really about the institutionalisation of the countries, and whether they are still a ‘work-in-progress’ in institutionalising. This can be improving regulation or improving macroeconomic policy. It can be rule of law, it can be transparency and disclosure levels. It can be capital market structures, improving investors' ability to put money in capital to work in the country. Being better at persuading local investors to put their own capital and savings to work.

So generally speaking, destiny for these countries is very much in their own hands. And beyond that, there are a number of countries that are also just only turning the corner after a tough economic cycle for various reasons. Some self-inflicted, some still post-COVID, some as a result of various events that have impacted the world in the last few years. But generally there we're seeing really good signs, despite rates being a little bit higher now. We're seeing good signs of governments really beginning to want to help themselves. 

I'll give a few examples, but there are many. Vietnam is really done a really great job in the last few years. First in initially fighting anti-corruption, second, dealing with some issues of bloating within its real estate market. 

It's been tackling corruption within its own operations, which is quite, quite impressive. A little scary when it first happens, but impressive to see that they are that open to tackling those sorts of issues. And in the last few years, they're really beginning to focus on improvement in laws and regulations to make ease of business better, to get things moving more quickly within the private sector, but also within government. Now officials are able to make decisions on more of a local and regionalised level. This includes lots of plans for rail links and road links, port expansions, airport expansions. And this is really driving a re-acceleration in gross domestic product (GDP) growth from about 2% around 2020 – tough times, still positive, but low – up to sort of 5%, 6%, nearer 7% last year. The authorities are convening at the moment to push for 8% real GDP growth this coming year. And there’s been more of commitment from the government that they'll very much be part of that growth push, which obviously is great for all businesses and growth for the banking system, credit demand, and of course to revitalise what has been quite a tough period of time for consumer confidence. 

So Vietnam is one market that's doing all of the above things as well as working on its capital markets to make foreign investors more attracted to the structure of that market, working on delivery versus payment, working on liquidity levels, looking to see if they can get some upgrades initially within the FTSE Russell indices, foreign ownership limits being one of the things that's also on the agenda. Really working across the board there. 

So, as I've said, we don't have as much exposure there as we had in the past until we see how the tariff impacts go. There's so many opportunities in that medium term that we're almost hoping there's a bit of a scare so that we can really build some strong positions there. Maybe that's a weird thing to say, but I'm just greedy, what can I say? 

Other markets are also doing a lot of domestic focused activity, particularly in the Gulf region. We're seeing this with Qatar for example. It has obviously large cash reserves and has embarked in the last couple of years on a plan to essentially double its capacity of production of liquified natural gas (LNG) for the world. And this is creating a lot of investment, a lot of spending, which has not trickled down yet. So that's still to come the next few years, probably later this year and through 2026-27. Those should be very good years, we could see GDP growth ramp up from sort of 2-3% in the last few years to 4-5%, and possibly 7-8% real GDP growth in a couple of years’ time. That will inevitably trickle down into the domestic economy again, good for businesses, consumer confidence, credit growth, etc. 

At the same time, they have been embarking the last couple of years, and they've engaged with us for maybe at least the last four or five years, on their capital market structures and the opportunities for improvement there and what foreign investors want to see. Again, transparency, disclosure levels, they've done an awful lot there. They've worked on market makers to improve liquidity and to the extent one year ago, Ashmore launched a Qatar country equity fund on the back of the opportunities that that we see there and what the authorities are trying to do there. We've just had the one year anniversary of the fund, and that's us putting our money where our mouth is, if you like, in that sense.

Elsewhere, Morocco has, quite encouragingly, government-driven spending and investment in infrastructure roads and rails to connect its cities more to enable trade more smoothly across cities within its own country, and then connecting it to Europe. There's a whole load of money coming in from the International Monetary Fund (IMF) and the European Union (EU) for some rebuilds and also some water desalination for solar energy opportunities. Then also there's a number of events that are coming its way in terms of the African Cup of Nations this year, they're going to be part of the World Cup group in 2030. So there's an awful lot going on that's also driving that investment there. 

And again, that trickles down into the corporates. Businesses there will be seeing improved demand and growth. The Philippines had a really tough time post-COVID. A new government has come in, which to be honest, has been a little bit slow in being able to enact its growth plans, but that's now beginning to happen. 

If you've ever been to Manila Airport, you’ll know it really needs a bigger, newer airport there. That's finally beginning to happen. And again, road infrastructure opportunities, and again, lots of really good businesses and management teams in all these countries, but particularly in the Philippines where valuations now are back to pre-COVID levels. So that's looking really interesting from an opportunity point of view as well. 

Kuwait is not a market we talk about too often, as not a lot of investment or spending has been going on there. The government and the parliamentary structure there has been getting in its own way and not being able to make things happen now. But that's really beginning to change now. The Emir has really stepped up and brought a small cabinet together to really push through proper change and that we're beginning to see the results of that. There's been road spending there as well. There are expectations for details of a mortgage law and a debt law to enable them to borrow, to invest, to grow. There's lots of housing that needs to be done there. So again, that'll really boost what's been quite a negative or subdued consumer there, as well as subdued credit growth as well. So, lots of opportunities in that market coming pretty soon.

I think it's encouraging that a lot of this is government-led as, as I've always said, it's about institutional change, but it's also about these countries realising that their destiny is really in their own hands and it's very encouraging to see so much in so many different countries right now pushing forwards in right directions in terms of spending growth, investment, but also capital market structure, which of course is important to us as well.

Stewart McAndie: Absolutely, thank you for that. So it's a story of strong and sustained growth across a variety of different countries and jurisdictions. Obviously, frontier markets have been outperforming emerging markets significantly for a number of years now. Can you make a comment on the foreign exchange (FX) dynamic? I know the frontier market currencies are less volatile than people think. Also liquidity has improved significantly, and then obviously the diversification benefits enable you to have returns with very low volatility.

Andy Brudenell: Yes. I mean, you've done a lot of the work for me there. People have heard me talk about this before, but the domestic focus of the countries that are a bit smaller and therefore not quite so plugged in to global trade and global economies generally means the economies are not quite as correlated. The stock markets are very much driven by local retail investors, which tends to mean although they're volatile in their own right, but because they're so uncorrelated with the other markets, if you have a diversified portfolio, like we do, you can end up with some quite low volatility in your portfolio overall.

The local focus of the stock markets also means there tends to be more price inefficiencies, so there is an opportunity to generate alpha as we have shown over the years. I think that a diversified approach with these markets shows people are beginning to realise that the larger emerging markets are having a tougher time as they deliver what they promise to do, namely become bigger and more integrated in the world and be more important to the world. The downside to that is you get more correlated with the developed world and you become a threat to the developed world. I think we're literally seeing that very, very clearly.

So these smaller markets are benefiting from not being at that stage, and being a decade or two behind, which is why we have so many opportunities to create a diversified portfolio. You need to be diversified, because obviously risks exist here. 

Having their destiny in their own hands is, I like to think, a positive, but of course it can be a negative. Governments can go in the wrong direction. There can be bad policy decisions, there could be bad monetary policy decisions, bad political decisions. So diversification is your friend in that sense. But also, as I've touched on, the lack of correlation between  markets means you can also build quite a low volatility portfolio. As you know, we have plenty of data showing that the volatility of the fund last year was possibly 10% or lower and 10-12% versus 18% for emerging markets (EM). And yet dollar returns have substantially outperformed EM on a one, three and five year basis, and since inception. 

So, we think that should be an interesting thing for asset allocators. If you've got something that's low vol, uncorrelated, performing well, and with a number of growth drivers that aren't global-dependent, I think that can be pretty attractive. 

There's also pretty good yields out there at the moment, because a lot of the local investors require a dividend. So, though these are growth markets, growth corporates are still required to offer good dividend opportunities for local investors, because there aren't so many financial products available for local investors to get yield elsewhere. And so you have quite a nice dividend yield as well that has been sustained over a long time and we have data on that as well. 

And all of this is happening within countries that are growing and investing and the stock markets are driven by the big companies within these markets. These companies might not be ones everybody has heard of, but there's not small cap emerging markets. These are big cap companies just in slightly smaller markets. 

In fact, the average market cap of the fund is five times the size of the MSCI Small Cap index average market cap, just to make that clear. It's not small cap. So, that also brings returns opportunities. These businesses don't have quite so much competition and they have opportunities in a growing pie to take share and also to generate outsized returns above their, albeit higher cost of capital, but above those levels. So, that ought to be very attractive to an asset allocator. 

I think the one thing I haven't touched on is currency. Obviously, there has been a lot of concern over currency in the last few years, with rates going up in the States. They've had a very strong dollar that's caused a lot of problems. There's now uncertainty on whether  some of the US administration's policies are potentially inflationary even if some members of the US authorities seem to disagree. 

The rate trajectory may not be clear, which means that the US dollar weakness globally versus the sort of trade currencies isn't going to perhaps ease like as much as might have been hoped for some of the emerging markets. And again, our markets have either already taken quite a lot of pain on those currencies and their economies are turning and it is slightly different and more positive-looking point in the cycle. 

But also there is a whole chunk of our investible universe where there is credible dollar pegs within the Middle East, and as I've touched on in that area, there's lots of domestic growth opportunities happening there as well. So, put all that together and you've got, some pretty good growth opportunities. Probably slightly better exposed versus the current risks out there in the world with a little bit of downside coverage on currency pegs with growth cheaper, growing faster, higher yields, less correlated, less volatile. That all ought to be pretty good. 

One statistic we were looking at recently was downside protection. Again, we have data on this that shows in terms of the fund returns versus the world over multiple periods (one, three, five, since inception) a versus EM tends to pretty much do a 100% of any downside move of DM. You know, this fund has only done about 60-65%, so there's a bit of downside protection there and on the upside it's about the same as EM. But if it's upside opportunity you're looking for, going back to your actual question, a lot of US concentration and people are very focused on that, but there is opportunities here for a portfolio that we think ticks an awful lot of boxes. And generally, as I always say, the main conclusion here is that the allocation to this asset class shouldn't be zero. We're not saying it should be all of your money, because we couldn't take it, thank you for offering, but 0% is definitely not the right answer and I think that still holds today.

Stewart McAndie: Thank you. I think that leads quite neatly into one of the questions that's come in terms of liquidity, because that's something that comes up quite regularly. Can you just give a couple of points in terms of how it's improved in the last 10-20 years or so since you've been managing frontier market money? And also, from a positive perspective, I was going to ask about upgrades, and what's on the horizon. If you can finish on that, thanks.

Andy Brudenell: So yes, liquidity. Yes, it's a different world. I first started looking at this asset class in 2007, so this is 18th year. Back then, there were some pockets of liquidity in the Middle East, Africa was very hard work, and Vietnam was trading maybe USD 50-100m, at the most, maybe nearer USD 50m. And there were liquidity constraints across the board. Capacity at the very outset of the product back at when I first started running it  was maybe USD 500m at the most. So we spent a lot of time working on exactly how to ensure that the illiquid sort of portion of the portfolio wasn't too large and it was a real focus and an issue even running smaller amounts of money. 

Today, to give you a sense, Vietnam has gone from USD 50-100m, to, I actually saw an email today from a local broker who was very disappointed there was almost no volume today and it was USD 450m. It usually does, to be fair to them, you know, nowadays do USD 700-900m a day, you're seeing more liquidity across the whole of the Middle East. The Philippines market remains pretty liquid. 

The number of issuances across the Middle East has also increased substantially. So there's also been a breadth expansion. The number of names that are investible across Vietnam has also increased. That has been a deepening of the market as well as a sort of breadth expansion in terms of businesses and sectors. Sustainment in Pakistan and Philippines and Vietnam across the GCC. Within Africa, it's definitely been a little bit more difficult. I think liquidity has picked up in North Africa, maybe in Morocco with sub-Saharan Africa still pretty tough. But that's a small part of the investible universe nowadays. So, the capacity of the fund is up, multiple times, and liquidity is up multiple times as well. So that is still something I focus on. We still look at smaller businesses, less liquid businesses, and we are aware of the illiquid tail as I call it, of the portfolio. But it's nothing like the issue there used to be kind of 10-15 years ago.

Stewart McAndie: Thank you, and maybe just a final word on potential upgrades.

Andy Brudenell: Ah, yes, I knew there was something else. We've seen a number of the GCC markets go in that direction. Oman is also hoping to move forward in that respect. They're bringing a number of businesses to market to try and increase their market cap and the free float market cap and that's a work in progress. Vietnam as I've mentioned, has lots of large businesses, but they just have some technical issues that they need to improve upon. It's a work in progress. FTSE Russell's report, towards the end of last year said they were happy with the initial changes and they're monitoring that. There may well be some news on that perhaps towards the end of this year. 

Markets like Iceland and Romania need to list a couple more names and it's touch and go. There's work in progress in both markets to maybe see that happen, which would be encouraging. So, there's still a good few that's still part of the potential story in terms of seeing that happen to bring liquidity, to bring more market attention and see a re-rating of  valuations. We're nicely positioning our clients' money for any opportunities like that that may also appear, but that's sort of gravy on top really. That's not the main focus of the fund. But yes, there definitely will be some opportunities there over the coming years.

Stewart McAndie: Thanks, Andy, and thank you for all the questions. Actually, there is one more question if you don't mind. Talking about valuations: "What are you seeing expensive versus cheap right now in the regions and how is this affecting your positions?"

Andy Brudenell: As I touched on, Philippines valuations are very, very attractive right now. We've been slowly building positions. They do have some things to sort out on the political front, and they need to get rates down a little bit to boost consumer confidence, but the businesses are in very good shape and so that is really a matter of time. So that's a very attractive one. 

Vietnam I've touched on a lot, so I won't talk too much about that one, yet still remains good value well off its high valuations that we saw in 2016-2017, but with a better structured market, a deeper, broader market with more, attractive growth opportunities. So that's really looking interesting. 

There are pockets of value within the Middle East. We see good value in Qatar, we see growth opportunities in Kuwait, but valuation has always been a little tricky there. The United Arab Emirates (UAE) is seeing huge structural changes and reforms. I haven't touched too much on this time, because there were so many other idiosyncratic domestic opportunities that I already mentioned, but the UAE is seeing huge reforms in that market's valuation. It's usually its neighbour Saudi Arabia that UAE is compared to, which still looks attractive and we still have good exposure there. There's pockets of value appearing in certain areas within Saudi Arabia. Again, often a little bit more of an expensive market, because within the region, it's so much bigger and more liquid. So it gets a little premium for that. And the last couple of years, it had growth that really justified that premium. Now, there's a bit of a short-term question mark about that. I think medium term, the outlook for Saudi is still very, very good. So there's pockets of growth, pockets of value rather, appearing there. Again, as some perhaps less dedicated investors who are a bit more short-term are making a dash for the exit, that simply brings us more opportunities. 

Within Europe, valuations has been cheap for quite some time now. Again, the resolution of conflicts in the region would also bring growth opportunities. Could there certainly see a re-rating there, be it Kazakhstan or Romania, particularly is where we're focused. We also have a good and very cheap business in Slovenia as well. So generally yes, valuations are good and outright cheap and where they're not, generally speaking, there are some pretty good structural reform growth reasons as to why. And obviously our job is to get the best of all worlds.

Stewart McAndie: Thank you. And I guess in aggregate the portfolio is trading on around nine times, isn't it? Which is half that of the MSCI World and, you know, paying over 20% return on equity (ROE). So, thank you very much indeed, Andy, for your time, and thank you everybody for joining. I appreciate your time. If you have any other questions, please follow up with your Ashmore representative. Otherwise, get in touch and we will speak to you next time. This concludes the webinar today. Thank you very much.

Andy Brudenell: Thanks, Stewart. Thanks, everyone.