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Stephen Rudman: Good morning and good afternoon. My name is Stephen Rudman, and I’m a member of Ashmore’s New York client-facing team. Thank you all for joining today's webinar, the topic of which is ‘Frontier and Small Emerging Markets: Winners in Volatile Times?’. Hopefully we'll address that issue and answer that question today. 

First and foremost, this webinar is for investment professionals only and not open to the media. Thank you. 

Today's speakers are Andy Brudenell, Head Portfolio Manager for our Frontier and Small Emerging Market Equities strategies, and  Gustavo Medeiros, Ashmore's Global Head of Research. Gus will be asking Andy questions, and hopefully we can leave you with some thoughts about how and why frontier and small emerging markets can be a great addition to your asset allocation. We’ll be addressing questions at the end of the webinar. With that, Gus, Andy, welcome. I'll turn things over to Gus. 

Gustavo Medeiros: Thank you very much, Stephen, and it’s a pleasure to have Andy Brudenell, our Head of Frontier Equities, with us for our last equity-focused webinar of the year. Can I say we're saving the best for last? Andy, can I start by asking how come our frontier strategy, and the benchmark of our frontier strategy, have managed to outperform emerging market equities in such a turbulent year such as 2022?

Andy Brudenell: Yes Gus, as you mentioned, the fund and our customised benchmark have outperformed, and this is a reflection of how we look at this asset class. The businesses in the countries that we look at are quite detached on a relative basis to global trade flows and therefore global policy. The whole idea is that this is a portfolio of assets that do something a little bit different for our clients. It's not developed world, it's not large cap. As the large emerging markets countries have done very well, they have therefore become much more integrated in global trade and global capital flows. As a result, they are therefore much more correlated with what's going on in the world. 

The smaller emerging markets countries, including what are called the frontier names, are yet to make that step up as a nation, to be a big global player in terms of trade. That's been one of the major reasons for the outperformance. But there are also a number of countries within our investible universe that have benefited from what's been going on in the world in terms of having quite stable and credible dollar pegs, and as a consequence have not been experiencing currency fluctuations. Some are energy providers, and perhaps some haven't seen the same level of impact from food inflation and grain, because it’s not the main source of food for a lot of these countries. It's mostly been grain and bread-related wheat, and not rice, for example. So, there are lots of little differences. But mostly it's about frontier markets being not as plugged in to global trade and as correlated as developed and large emerging market economies are. That's why we think it's an interesting product for clients.

Gustavo Medeiros: Okay, excellent. As you know, my experience and background is mostly EM debt, and I've been on a journey to better understand our equity universe. So, can you give me a quick recap on the definition and the key characteristics of the universe that your team invests in, please?

Andy Brudenell: Yes, and I think the structure of what we're offering here is really important. It's about how you build it. A lot of frontier-branded funds out there simply follow what the MSCI indices or FTSE indices regard to be frontier. That's really simply driven by free-float market cap in dollars. Whereas for us, we think there's something far more nuanced going on here. Really, to our minds, the definition of a frontier market is any capital market and any country and economy where there's a structural weakness in institutions, such that investors – local or foreign, retail or institutional, entrepreneurial or whoever they may be – need to think twice about whether those institutions running that country have their backs? Do those institutions want investment, and do they know how to have the right rule of law and regulation to enable it? Are there backstops? How smoothly do the capital markets function? Are these institutions experienced in macroeconomic policy, or fiscal and monetary policy? That, to our mind, is the real criteria for frontier market counties. Essentially, they are smaller markets because not as many investors are keen to put large amounts of money in. That is a risk, but of course as we know with risk comes potential return. That's the opportunity set.

Many years ago, we set out to invest in a group of countries that have weaker or less solid institutional frameworks, but are making progress to move in the right direction. Our job is first to find out those countries that are really going in the correct direction in terms of better rules of law, better regulation, better macro policy, better budgeting, better currency management, better real estate, zoning rules and laws, and all the things you need to function as a capitalist economy. That takes time, but you've seen the emerging markets do it, and you've seen some of the smaller developed markets have now come through that path. What that brings is confidence, and with confidence comes more capital and growth. 

And as I mentioned before, what also comes is more correlation to the developed world, but with the benefit of being a much larger nation. So that's a good thing going in the right direction. The big emerging markets that we know today were in this position 30 years ago, so there's also a path to be followed. 

But what you end up with is a very diverse range of economies that are still in quite an early growth phase. They still very much have their own destiny in their own hands. The countries we include encapsulate all of that. And that's why we think it's different. It's a more balanced investible universe, and we think an exciting one.

Gustavo Medeiros: Excellent. Well, growth and uncorrelated are two magic words in today’s investment universe, and very hard to find indeed. It all sounds very good, but can you give us a few pointers on the traps to watch out for, when it comes to frontier and smaller EM countries?

Andy Brudenell: Of course, obviously, from what I've laid out, it sounds great. But there's a lot of work to be done. And it's not a straight path to glory. These small nations are not going to be just like America in five years' time. We all know it's complex, and missteps can be very painful. These missteps tend to show up in a significant, sudden lack of capital, and in capital outflows, and also in currency movements. And that, as we know, can be very painful. So, the likes of Nigeria, Argentina, and Sri Lanka, for example, have all mis-stepped in the not-too-distant past. This can include mistakes with monetary policy, fiscal policy, or both. It can also include just unfortunate scenarios, and if you’re an importer of food and energy, it's been a very tough year for you. 

But if you acknowledge that and allow your currency to move as a buffer to deal with those issues, you will get through them, and the capital markets will give you a bit of a break in that respect. This comes because they know that there are mechanisms in place to deal with issues, and that the country’s institutions are strong. Our job is to really understand that, while acknowledging there is not, as I say, a straight path to glory. But it can be done, and it has been done. And we know there's a well-trodden path of small nations like China, Brazil, back in the day, and more recently Poland, making that progress.

Gustavo Medeiros: Excellent. It’s interesting to hear that many of the countries that you mentioned as a trap maybe 15 years ago, we would be talking about them as opportunities. So, it's a space where you really have to be active to understand the risks. And also, a country that represents a massive opportunity can flip, so being active is quite key.

Another question that I think most clients have, and I certainly do, is about liquidity. There’s a preconception when you think about frontier markets and smaller EM countries that it is going to be a relatively less liquid place and therefore harder to navigate. Is that a reality or is that a misconception? And can you share a few examples if possible?

Andy Brudenell: Yes, we get this question quite a lot, and liquidity the size of the capital markets as well as the free-float of the capital markets, is obviously a factor to consider. But we're not asking everyone to sell all of their developed world and emerging market money, and put hundreds of billions of dollars into frontier markets and the smaller emerging markets. We understand that right now that wouldn't be possible. But that's not an excuse to have zero exposure. 

What we're really saying, is that given the more diverse, less correlated, lower volatility nature of the asset class that's been proven over many, many years, an allocation of zero on the grounds that it's a little bit illiquid is not really good enough in our minds. 

Also, frontier market liquidity has improved substantially over time as markets have grown, economies have grown, and capital markets have grown through better regulation, more foreign ownership allowance and through many initial public offerings (IPOs). The governments of frontier market countries have been working out how this all works, and are providing opportunities for foreign investors in particular to take up more business ownership. We’ve liquidity pick up an awful lot across the whole of the Middle East region, with the likes of the United Arab Emirates moving from USD40-50 million a decade ago to hundreds of millions now.

That's also happened to Vietnam, where a couple of hundred million dollars three or four years ago now is now getting closer to the billion-dollar mark. There have been big improvements in terms of what liquidity is now possible in dollar terms. Of course, there are nations and capital markets that haven't done as well, for reasons we touched on, and again, that's why it needs to be an actively managed portfolio to cope with those changes.

Gustavo Medeiros: Excellent. It sounds also like a bit of a procyclicality in liquidity as we see across all markets, but with more on the structural side that we have to monitor. In our past two webinars, we've shared perspectives from EM Active, our top-down-driven equity team, as well as the more traditional bottom-up strategy, EM Equity. Where does your frontier approach sit when you put it into this perspective?

Andy Brudenell: Hopefully, it's become clear that our approach is very much in the middle given the importance of the institutional frameworks and the improvements that governments, regulators and central banks need to make to move forward as a capital market and as an economy. Our understanding of that is perhaps more important than in other markets, just because of how volatile these markets are and how much change we expect to see. 

There is a portion of macroeconomic thought that goes into covering all of those big top-down institutional structural factors, and it is an important part of the process. But most of our time goes into identifying some economies that are going in the right direction from an institutional point of view, and are perhaps well placed given the global current environment, be it a strong or a weak dollar, or high energy or low energy prices.

Having established which economies might be in good shape for that, most of our time is expended on finding good businesses within those economies. The ideal scenario is to find companies with a good management team who think about capital returns and the cost of capital the same way that we do, are quite transparent and give good levels of disclosure, and have a good business model and strong growth outlook. Also, they need to be operating in an environment that's conducive to investment and growth. This means where a regulator is not going to be changing the rules tomorrow, where the central bank is not going to damage the economy, or where the government is facing massive political turmoil. So, while there are definitely top-down factors involved, more of our time is definitely spent on the bottom-up stock picking.

Gustavo Medeiros: Excellent, very good. We've been mentioning in our recent webinars, presentations, and the pieces we've been writing, the importance of the geopolitical risks for the outlook and for investing over the next few years. The number one rule of thumb when it comes to geopolitical risks and investment considerations, is that you want to invest in neutral countries that will be able to benefit from geopolitical turbulences. It strikes me that a lot of the neutral countries that we discuss very often in Africa, Central Asia, Middle East, in Southeast Asia and other Asian places are really frontier countries and smaller EM countries. That is the universe that you monitor quite closely. I think it's very interesting that not a lot of investors have exposure to these assets, and that their uncorrelated nature makes the frontier space even more interesting. So, my final question is to ask why do you think that frontier and small EM countries will keep on outperforming and delivering good risk-adjusted returns over the next few years?

Andy Brudenell: Yes, of course, that's the big question from here. Given there are still a lot of reforms and improvements to come for a range of nations, I think there are a lot of interesting things going on right now. There are continued structural improvements and growth stories and investment and foreign direct investment (FDI) coming into Vietnam, into Romania or into Iceland. There's also great progress being made across the Middle East, particularly UAE and in Qatar. And all of that ought to continue. 

In the case of the Middle East, obviously, they've had a nice time given the higher oil prices and being dollar-pegged. Their banks have enjoyed higher rates around the world, and so have been increasing margins. And that's great. But also, during this time governments have been building very large balance sheets off the back of this scenario, and they are well aware that this won't last forever. They recognise they need to think about transforming their economies and diversifying. They also need to think about the energy transition that the whole world is going through. And they are very much on top of this. So, they have been spending a lot of time investing in non-oil economies, looking at transition fuels and renewable energy, be it liquefied natural gas (LNG) as a transition fuel, or the future of hydrogen as an alternative new fuel, as well as solar, wind, etc. These countries are spending heavily on this, and they have the balance sheet and the funds, particularly after the last few years, to really invest heavily, build industries and create a sustainable growth story for their country, and for the region as a whole. 

Part of the neutrality you mentioned also plays a role. There's been a flight of capital towards stable, more safe regions and countries, particularly the UAE. That is a structural story that I think can continue for quite some time. 

Qatar today are now signing a long-term 15-year-plus deal for LNG to Germany. The horrible events in Ukraine that have occurred this year have created change that will hopefully have some stabilising and positive benefits for Europe and also for the world, in terms of diversifying energy sources. And, of course, there will always be some nations that will benefit from this. The country of Georgia is seeing the whole Caucasus region becoming much more of a focus in terms of trade routes, and that's going to bring a lot of capital. It's also bringing in skilled labour from other countries in conflict. In Vietnam, the issues that we've seen with their neighbour China is resulting in improving skilled labour in Vietnam at a cheaper price. As a result, we have been seeing a lot more FDI coming into that nation, and that's going to continue. The market there is particularly cheap right now, and is therefore one of our focus points. 

Similarly, but on a smaller scale, Romania is showing a reversal in what has been quite a large amount of exits of its population. People are coming back. They're also much more skilled. But it's still quite cheap labour compared to the rest of Europe. A similar story is underway in Morocco in terms of how it can service Europe. So, there are plenty of opportunities still out there across a whole range of countries that are focused on completely different areas of comparative advantage in their markets. Valuations still look very attractive, so I very much feel that this can continue to be a structural growth story.

Gustavo Medeiros: Excellent. One of the questions that we always get when we're discussing emerging markets is friendly shoring or near-shoring. People ask very often about Mexico and other countries, but not a lot of people have paid attention to the massive boom that Vietnam has achieved already. Vietnam has already had a massive capture of market cap over the last three to five years in the low and middle value-add manufacturing side, but that is now also happening with the higher value-add manufacturing too.

I've seen the headlines that Vietnam is starting to export electric vehicle (EV) cars to the United States. It's a story that is already playing out, and it's a structural growth story that is very clear, where not a lot of people have exposure. With that, I would like to see if we have any questions from our clients, Stephen.

Stephen Rudman: Yes, indeed we do. As you just touched on Vietnam, there's been a bit of bumpiness in the markets recently. Do you think that has any potential to impact the long-term structural success that Vietnam has been on the path now for a few years?

Andy Brudenell: Yeah, that is a good question. This may sound odd for me to say, but Vietnam is a very good example of how investing in frontier markets is a bumpy road. It's not a straight path to success in becoming a large emerging market, or even a small developed market, because policy every now and again will misstep. That’s the issue we've seen in Vietnam. We don't think it's structural and terminal, but we have seen what would normally be considered a good thing: the birth and fast growth of Vietnam’s domestic corporate bond market. It ought to be a good thing in terms of the development of the financial services and the capital markets for the nation. However, they weren't regulated quite as tightly as they should have been, and there's been some issues within that market in general. It's had a knock-on effect into the real estate market, which has essentially been the main utiliser of corporate bonds. 

Briefly, there was a regulatory change that had an unintended consequence of resulting in banks wanting to offer less capital to real estate, so they had to go to corporate bonds for funding, but the corporate bond market was a new one. The regulator stepped in but didn’t quite get it right, and there’s been a subsequent panic and bit of turmoil. While some companies aren’t going to do well, it’s mostly created a crisis of confidence. But hopefully, it's a learning step for the capital markets in general and for the regulator.

We think it's a good buying opportunity for businesses that are not directly involved in this space. It's something that we've been monitoring for a while. We haven't had any exposure to any of the businesses that are flagging up any issues, but it's interesting to see how the regulator and how the government deals with this, and when they decide to step in.

Perhaps encouragingly, they haven't just stepped in and thrown money at the problem. They're trying to work it out in a sort of more sustained, regulated manner. Even so, this will have a bit of a drag on Vietnam’s markets. 

The other thing that's happening in Vietnam at the moment, is the manufacturing boom as Gus mentioned. VinFast is the electric car company. Five years ago, the auto industry didn't exist in Vietnam, and now they're exporting electric vehicles to the USA. That's pretty incredible. That’s just one area of growth, but there have also been investments by Samsung and Intel and various European and Japanese and Korean companies. Samsung has invested in a big way, and Apple has just announced it's going to be investing even more. So, looking structurally longer term, there's an awful lot that looks very good in Vietnam. Yes, we agree there's been a little bit of a hiccup and a crisis in confidence, but we think in the next six months or so, that's a buying opportunity, and not a terminal hit to the country.

Stephen Rudman: With the expectation of recession in the West, do you think there's a particularly meaningful impact to frontier markets? Or is it a non-event? And the second question is relative to single country risk – in other words, how willing as a portfolio manager are you to give up a potential super growth in a market to ensure that the portfolio remains classically diversified? Do you still feel compelled to keep the portfolio well diversified so that you don't have any specific high country risk?

Andy Brudenell: Yes, absolutely. We have to find a balance between getting very excited about the opportunity set of a country or various companies within our universe, against institutional weakness. 

We could have got very excited about Vietnam earlier this year, as it was down 20%-25% on earnings that were up 10%-20%. So, a significant derating of the valuation of Vietnam meant we could have stuck 40% of the fund into that country because it looked so great. 

But related to the first question, we knew the world was slowing down and that Vietnam specifically, has a trade structure that's important for that. But also, we know with frontier markets that a policy misstep is also possible. And given there's reasonably high risk in this asset class as it is, you can diversify that risk. Diversification is your friend. 

I don't ever really want to be so greedy as to go after one particular story, one particular country too aggressively. Because I've been investing for 25 years, and every now and again something unexpected occurs. It obviously would be described as the black swan event, a kind of external shock. But in frontier markets, it can also  be an internal misstep. 

And as I've just outlined, that's what's hit Vietnam down another 15, 20% in the recent couple of months or so. So, it's just as well we didn't heavily bet on that based on our enthusiasm for the bottom-up longer-term picture.

We have to balance the fact that we have a large investible universe. There's lots and lots of good things going on and lots and lots of countries. I don't ever want to get drawn into one particular country too much. 

There are occasions when that's hindered us. There's been a year when I think Pakistan did particularly well. And we should have had all our money in Pakistan. But the hindsight fund always outperforms. We kept diversified then, and while it hurt us for one year, for the following three years, it was very beneficial that we hadn't put all our eggs in one basket. 

Regarding the recession question, although I say that this asset class has economies that are not as plugged into international trade and the global economy as others, it's not zero, it's just less correlated than emerging markets. When we speak with clients on this topic, we meet lots who are very comfortable to own plenty of emerging market exposure. It's a core part of their asset allocation. And yet frontier is always zero And we just say, "Well that doesn't really make a lot of sense." Because there are risks in all of these emerging markets, and they're very, very correlated. It's not the same allocation that you gave an EM 20 years ago. It's much more a play on global trade. It's much more of a play on global sectors like technology, particularly for China, Taiwan, Korea, which are an enormous part of the EM index. 

So, frontier is just much less correlated than that, but it's not zero. A slowdown in the US and Europe, will have a bit of an impact on Vietnam, but partly offset by the fact that a lot of businesses, as I've touched on: Samsung, Apple, Intel, etc, are investing more in Vietnam and taking the manufacturing away from other countries. So that would partially offset that slowdown in growth. But also, a global slowdown would probably reduce food prices and energy prices, which will then help a whole load of other nations that we have exposure to. There will always be offsetting factors.

Obviously, if China doesn't reopen, and Europe and the US are in a recession, then of course it's going to be very hard work for everyone. I'm not going to tell you that frontier markets are disconnected, and that it doesn't matter what's going on in the world: that would be crazy. We're just talking about relative sensitivity and correlation to those factors. Therefore, if you are worried about a recession scenario, then obviously as an asset allocator, perhaps it makes sense to be putting less into the developed world and less in large emerging markets. It might then also be worth putting a little bit in some of the smaller emerging markets and frontier markets that we offer.

Stephen Rudman: I don't think we could end with a better statement. So, with that, Andy and Gustavo, thank you very much. That was great. I would like to thank all the people that joined today, and to remind you that we will be sending out a replay. If you have colleagues who may find some value in this, please share it. Moreover, if you have any follow-up questions or would like some data on the things that we discussed today, please reach out to your Ashmore representative. Until the next time, good-bye.

Andy Brudenell: Thank you very much.