Stewart McAndie: Good morning and good afternoon. I'm Stewart McAndie, a member of the Ashmore UK Client team. Welcome to everyone and thank you for joining today's Ashmore webinar titled: How Are Emerging Market/Frontier Debt Markets Holding Up?

For today's webinar, we are joined by Gustavo Medeiros, Global Head of Research, and Alexis de Mones, Portfolio Manager within the Emerging Market Debt team, for a discussion on the resilience of emerging market (EM) frontier debt markets, both in the current environment and also an outlook from here. I'll start by handing over to Gustavo to set the scene, and then Alexis will be asking some questions or answering some questions following that. I'll hand over to you, Gustavo.

Gustavo Medeiros: Well, thank you very much. It's very good to be here with Alexis in our brand-new Ashmore office around Victoria here in London.

Alexis de Mones: Lovely room.

Gustavo Medeiros: Pretty nice room, pretty nice office too. Hopefully we'll have those of you dialling in visiting us quite soon. But, yes, we'll start by talking a little bit about global macro?

Alexis de Mones: Yes, so to start with the broader picture – a tall order as things change daily these days  – can you set the scene and tell us what are the global macro dynamics that EM debt investors have to contend with?

Gustavo Medeiros: First, we have to admit that we started the year thinking with the view that we were going to have a 'Goldilocks'-like scenario with artificial intelligence (AI) and China exporting deflation to the rest of the world being the main forces driving the global macro environment. The thesis was very simple: AI is very productive but leads to a very large amount of job displacement, and China using this technology to improve its capabilities in the manufacturing sector would be deflationary. The first is disinflationary, the second is deflationary. This would potentially allow central banks to cut, perhaps more than expected, but growth would be supported by stronger-than-expected capex or capital investment. But then obviously came the exogenous shock. It was a classic supply shock, a massive disruption in energy markets, larger than the 2022 disruption in terms of the quantum of energy disrupted.

And in an energy shock, there's not much that monetary policy can do. You know that energy prices are going to spike significantly, and that's going to have an impact on incomes. In fact, incomes are likely to suffer in real terms as a result of this energy spike. And if anything, down the road, that could lead to weakness in economic activity away from the energy sector. So, what central banks should do is talk hawkish, but do nothing, right?  That would be the right policy approach.

In terms of broader economic policy, we should be seeing countries releasing strategic reserves and putting forward incentives for consumers to reduce their energy consumption. I think if most countries would adopt that, there will be some demand disruption that will have the minimal disruptions on economic activity. Developed market (DM) countries did release reserves, but several rich countries cut energy taxes, which is an implied subsidy, cutting VAT, etc, which is slightly counterproductive because you're not putting these incentives towards lowering consumption. This just means that the poorer countries have to take the bulk of the adjustment in terms of demand destruction, to the extent that the richer countries are actually pushing against that.

Alexis de Mones: So that's what DM governments have done, because they have the fiscal room, I suppose, but across EM and across frontier markets, what have these governments been able to do so far? What have they announced?

Gustavo Medeiros: What these countries have done, in a nutshell, is to try to preserve fiscal discipline, announcing a number of measures that would raise tax revenues and cutting expenditures if necessary. At the same time, they have adopted policies to reduce their vulnerabilities to oil imports. Effectively, they had to reduce the quantum of energy consumed. So, several countries put policies in place, including limiting the mobility on public servants. Non-essential workers have been asked to work from home, for example.

Alexis de Mones: The four-day week?

Gustavo Medeiros: Four-day weeks have been implemented across many countries in Asia. Vietnam, for example, announced a priority pass for domestic coal transport and trying to incentivise transition from one energy source to another. There are several examples. Some of them were mentioned in our weekly updates recently. Sri Lanka reactivated a QR code that gave drivers a weekly allocation of 25 litres of fuel. Pakistan announced the four-day week that you mentioned and several measures to cut expenditure, including cutting expenditures to public servants, cutting fuel allowances, grounding the fleet of state cars.

Alexis de Mones: Pretty drastic in Pakistan.

Gustavo Medeiros: Correct, a lot of these countries are incentivising the private sector to actually mobilise. So those measures are negative for growth, but they do what needs to be done in an emergency where you don't have a lot of buffers, which is the case in these countries with relatively low energy imports. So, this is where we'd be concerned the most. But having said that, if you look across the performance on frontier debt, you'd have quite the opposite picture. The performance has been relatively positive to the rest of the asset classes. Can you please walk us through what's been happening there?

Alexis de Mones: Well, partly because they've done the right things to limit their fuel imports bill, but also for other reasons, fundamental and otherwise, which we'll review. But, yes, frontier debt markets have performed very well over one year, they're up about 25%, give or take, over one year.

But over the month of March, which is this big market correction, they've clearly outperformed the broader EM universe. So, if you split between the external and local currency part of the frontier debt market, the external debt market frontier asset class has been in line with, say, the EMGD, down about 3.3% for the month, a little bit worse, but really nowhere near the sort of beta that you're used to for that part of the market.

And in local currency, the frontier debt markets have done quite a bit better than the broader EM debt space. And they were effectively down only 0.7%, which is a very, very strong performance when the GBI-EMGD was down even more than 5%. So, it is the local currency part of our market that's delivered this sharp outperformance.

And on that, if you'd like a blended frontier, that product will have been down about 1% on a year-to-date basis. So here I'm talking about the year-to-date basis since January, whereas a broader EM debt product will be a blended debt product could be down about 1%. Sorry, the frontier debt product would be up 1% versus the broader being down 1%, so a 200 basis points delta on a year-to-date basis. And that's a great outperformance.

Gustavo Medeiros: Absolutely, remarkably, even considering that people would expect this asset class to underperform rather than outperform, right?

Alexis de Mones: Particularly in terms of market drawdowns, yes, that was really a positive surprise.

Gustavo Medeiros: So, outperform on the way up, outperform on the way down, that sounds like a pretty good, that's a pretty good dynamic. So why did these sub-EMs did so well?

Alexis de Mones: Well, the story is really largely about oil and commodities. So, the frontier debt market is quite more exposed to commodity prices and has a lot more oil exporters and commodity exporters than the broader market. On the energy exporters' side, you have the likes of Kazakhstan, Angola, and Nigeria, Azerbaijan, and others. Pure oil and gas exporters. And on the broader commodity metals exporters' side, you have also a lot of gold exporters and producers like Ghana, and copper producers like Zambia, for instance. You do have more aggregate product exporters, but now actually also fuel exporters like Argentina, and Uzbekistan exports gold as well and other mining products.

That's the first part of the story, and actually it translates into this outperformance in FX terms. So, in March, you can see that the broader frontier debt space, the local frontier debt space, was down 1%. But if you're either an oil or a commodity exporter, those currencies were actually up 1%. So that's really the big difference. You can see that in the local currency part of the market quite clearly. So that's the first thing. That's the fundamentals.

And then the two other aspects that will also explain the outperformance. One is the nature of the asset class, which has a shorter duration on average, both in the hard and local currency products, so less volatility because of a shorter duration. And then in FX, a lot of countries really manage their currencies, so they don't have freely floating exchange rate policies. They can spend reserves, and they had reserves to intervene. So that's also buffeted the volatility. So, these are the three main reasons, fundamentals and the two technical reasons I mentioned.

Gustavo Medeiros: There has been significant structural reforms over the last two to three years within these countries, that means they are managing the crisis in a much better position.

Alexis de Mones: Yes, they built buffers. FX reserves have been one of them, also domestic demand management. Even in those countries that are importers of energy and other sort of food products, which have gone up in price recently, they've managed to limit the impact on their economy because, for instance, some of them are services-based economies, like in the Caribbean, and Dominican Republic, for instance, is quite exposed to energy imports. But all they do is provide services mainly, so they're not a huge user of energy inputs, for instance.

And in other places like in Egypt, which has been famously quite exposed back in 2022, actually most of their energy sources comes from gas from Israel, and the supply was disrupted only briefly and as has restarted recently. So, by and large, in Uzbekistan, for instance, a pretty industrialised economy that has a lot of energy input for the industry, they have access to Russian energy sources. So, they were not so exposed, at least for these countries, to the disruption of the Strait of Hormuz.

Gustavo Medeiros: Okay, very interesting. And which countries did better, and which countries did worse? Well, obviously, you just told me the March performance was pretty much a terms-of-trade story, Nigeria, Angola, Kazakhstan outperforming the likes of Pakistan, Egypt, etc. You would expect so far in the rebound, let's say, month to date, to be seeing the opposite.

Alexis de Mones: We've seen a big rebound, actually. Those that fell the most, by and large, rebounded the most over the last couple of days. But let's say in the local currency market, a lot of the underperformers were really driven by the fact that the positions were popular and crowded. So, a lot of the sell-off was technical in nature, a cleanup in positions during the month of March. And obviously following President Donald Trump’s ‘TACO’ ceasefire move this week, there was a lot of rebuilding of positions and short-covering, and those positions that are high carry and favoured by investors actually rebounded the most.

Egypt being one of them. It had gone down in FX terms as well, but also did very, very well over the last couple of days. In external debt, things have rebounded very nicely as well, but it's less technical, a bit more fundamental. I'd say those economies that remain more vulnerable from a balance of payment, in terms of trade perspective that have fallen the most, Ukraine for instance, was down about 12%, or Sri Lanka, those are countries that were down about 6 or 7%. They have rebounded over the last couple of days, but they've only retraced not even half of what sold off during the month of March. So, there is still some differences and divergence related to the fundamental challenges that remain.

Gustavo Medeiros: Lebanon as well obviously is at the high…

Alexis de Mones: Lebanon is also obviously being talked about because there is hopes of maybe a ceasefire involving Lebanon.

Gustavo Medeiros: And against this backdrop, we go to... There is meetings again in Washington DC next week, the Spring meetings of the International Monetary Fund (IMF).

Alexis de Mones: Yes, IMF Spring meetings and a lot of conversations about where certain programmes are going to be going. But by and large, I mean, I think that we can expect the tone to be muted because of what's happening in the world.

But if you look at how the programmes are progressing, by and large, the IMF programmes are on track pretty much I'd say everywhere. You have a couple of exceptions. I think Senegal stands out because there is disagreement between the IMF and the administration, and in Bangladesh as well for different reasons, but also the programme seems to stall. But apart that, say in most regions, the programmes tend to, they look very much on track.

In Latin America, there's nothing that is holding up proceedings. Even in El Salvador, I think they don't need the money immediately, so it's on track. In Europe, Ukraine was the bigger question mark, but they have a new programme, and so I don't think that this is going to be talked about that much at the IMF meetings next week.

And if you look at the rest of Europe, Georgia, Armenia, for instance, these programmes are very much on track. Asia, that's really where most of the pressures have been felt in terms of balance of payments. And here it's really Pakistan and Sri Lanka that stand out. In Pakistan, they've just signed a new deal with the IMF. So, again, I think those issues that could have been front and centre have been dealt with ahead of the Spring meeting, so hopefully everything has a more positive tone.

Gustavo Medeiros: All right, good.

Alexis de Mones: And in terms of the fundamentals, I think you've done some work on the fundamental impact of these moving oil prices on fiscal accounts, particularly, because there's been some concern that if the countries, as we said earlier, intervene to shelter their consumers, this is going to have high fiscal impacts. But by the same token, for those oil exporters that will benefit from higher oil prices, what can we look forward to? And do we have some strong performance going ahead in some of those countries?

Gustavo Medeiros: Yes, I mean, oil prices are now, energy price in general, are above the budgeted level for the fiscal accounts and the estimated levels initially for the external accounts for most of these countries. So, in Kazakhstan, for example, estimates vary, but a rule of thumb that J.P. Morgan published suggests that a $10 increase in oil prices would improve their fiscal revenue by roughly 1.2% of GDP, and their current account levels would improve by 1.4% of GDP. Nigeria we're talking about.

What's going to matter is what is the average oil price, throughout 2026. I think that it's not a stretch of talking about average oil price at $85, $90 at the moment. If we're talking about oil prices in the $90s to $100s, for the last month and $90+ for Q2 and then declining towards $75-$80 towards the end of the year, maybe. We're talking about $80 broadly speaking on average. But, yes, the longer it takes for the ceasefire to last and the longer the shutdown of Hormuz remain in place, the higher potentially these windfalls.

In Nigeria, we're talking about 0.5% of GDP improvement in fiscal revenues with 1.2% of GDP improvement in current accounts. And in Angola, 0.7% of GDP improvement in fiscal revenues and almost 3% of GDP improvement in external accounts from a $10 improvement in oil prices. So, to your point, it's a terms of trade story at the moment.

The market has not been pricing very, very negative scenarios of the Strait remaining closed for a significant amount of time. As a matter of fact, the ceasefire pledge that we've heard a couple of days ago came more or less in the five-to-six-week time horizon that was signalled at the beginning of this war that the conflict would last.

So, if we do have a deescalation from here and a normalisation of flows, that is the most important factor for energy markets and for broader markets, in general. Then maybe there will be these small terms-of-trade gap but not a massive amount of disruption to the global economy.

Alexis de Mones: Very good.

Gustavo Medeiros: Yes, well, there's a lot more. We've published a piece late last month obviously talking about the impact of the Strait of Hormuz. The other point to highlight is that in the midst of the crisis, we had the classic VIX shock. So, the volatility index of the S&P rose by more than 10% above its 60-day moving average, which historically we've been monitoring as a potential opportunity. And if you look at the backtest of that across most EM and frontier asset classes, from the VIX shock until the end of the subsequent month from the VIX shock is the ideal horizon to buy into these asset prices to take advantage of the dislocations.

Because we didn't have significant dislocations until the third week of March, when we were finishing writing the piece, perhaps this time it will pay out to wait a little bit until April, but we thought that there will be an opportunity potentially to buy asset prices in April.

This ceasefire is not going to be in a straight line, most likely. There is going to be a little bit of volatility, but any dislocations from here... It's pretty clear both sides do want a ceasefire. They have incentives to do so. You can discuss time horizon, you can discuss the strategy, you can discuss the strengths and weaknesses. But it's pretty clear the bar is really high for a very long-lasting conflict across for the main sides involved in this conflict, like the US and Iran. I think that the signal remains there. If you look at all the yield to maturity, they're still trading relatively wide levels. There was a pretty decent widening on global rates. So that allows for a slightly better entry point.

Alexis de Mones: Oh, for sure.

Gustavo Medeiros: The underperformance has been relatively muted. Any questions from the audience, Stewart?

Stewart McAndie: Yes, thank you both very much for those comments. We've had a question. Can you just put into context for everyone watching where duration sits within both the hard currency and the local currency side, and overall, how that compares with the broader markets?

Alexis de Mones: On the sovereign debt side in dollars, the broader market is a six to seven-year duration product. In the frontier space, it's closer to a 4.5, five-year-duration product. So, less duration in the sovereign debt because you're dealing with high-yield countries that don't borrow in the 30-year part of the curve. In local currency, which is a big part of what we do and about half of the exposure in the fund currently, few countries have, say, a 10-year curve. A lot of countries have a local curve that goes to the five-year part of the curve, and some of these curves being inverted. We like to play in, say, the FX forward, so three month to the two-year part of the curve. But put these together, and we have a product that has a duration between two to five years but certainly not over five years in duration. We're closer to two to three years right now because of the shape of these curves. So that limits the volatility from the duration risk factor.

Gustavo Medeiros: Yes, and one thing that we were highlighting over the last couple of weeks, both in the Investment Committee and to clients that we speak to, is that it was hard to find large dislocations within this shock. But one place that we did see some dislocation was in rates, because the market came into that scenario with a 'Goldilocks'-like mentality, and the market was pricing cuts. The fact was that there was a lot of... The technical position was very poor there. You had a very large number of participants receiving rates, and when the shock came, and inflation spiked, obviously the expectation that the shock is pretty clear, fitting through inflation in the short term, there was a very large withdraw of position. The more that positions were concentrated positions, the larger the withdrawal. It's not a frontier country, but Hungary, for example, saw a big sell-off, Romania is a frontier country, and Brazil, pretty much all markets in the developed world, Europe and England are now pricing hikes, which I think would be a massive policy mistake if implemented for the reasons I mentioned initially. So that was the shock that probably insulated this part of the asset class.

Stewart McAndie: Thank you, and without speaking specifically about the fund or on the strategy level, you mentioned there's quite a bit of discrepancy in terms of from between the dollar and the local currency move in the last month. Have we made any changes to take advantage of that within the strategy, or is it too early to make those?

Alexis de Mones: No, we've been active during the month, evidently initially to really manage the fund's exposure to the oil importers, and Egypt was a big position which we've reduced. But in terms of the top-down view, hard versus local, I think where we've sold in general, we've sold a little bit more on the hard currency side because really the valuations in hard currency were a little bit more stretched, and so the upside-downside I'd say the risk-reward was probably better in local currency and local, in FX products than in hard currency securities, also for the duration reasons that I mentioned. So, we did sell out of long-duration assets not only in Egypt, but in other markets where we had longer duration exposure as well. So that's why we've reduced hard currency exposure a bit more. But these would be the main changes from a top-down portfolio construction point of view.

Stewart McAndie: Thank you. You mentioned earlier that frontier markets or frontier-blended portfolios significantly outperformed over the last year?

Alexis de Mones: I gave you the wrong number, actually. I should have given you a positive three-year-to-date as opposed to a positive one-year number, which is 400 basis points better than typical blended products in the main emerging market debt space. So, a big outperformance year to date.

Stewart McAndie: And just looking forward, you mentioned yield to maturity. Can you give us a bit of a steer in terms of where they're trading now and how that compares to the broader markets?

Alexis de Mones: Roughly over the last few months since the turn of the year, the yield available in the pool of assets – in the markets that we like, that we trade and that we own –  in the funds have been coming down over the last three to six months, from about 11% to about 9% yield to maturity, with a recent move higher in global interest rates and some of the widening we've seen in hard currency paper and moving local curves as well. We've gone back to a yield of about 10% to maturity in the frontier debt product today. Now, the current yield is the best indication of future returns in fixed-income space, but we obviously have a local currency and FX element to the risk.

We can't hang our hat on 10%, but that's still our target excess return over the cycle, is to generate about 8% to 10% returns over the cycle. Right now, there are opportunities for more because we're still coming off from a period of very elevated local yields particularly. And we had been in the midst of a disinflationary period. Hopefully, that resumes, but depending on that, we'll have more or less returns from the disinflationary trade.

Stewart McAndie: Thank you. We just had another question... Sorry, carry on.

Gustavo Medeiros: Just the other aspect that I'll highlight is that the dollar should have caught a very large beat, right, because if you think about it structurally, the largest countries in the world, the US benefits, as it is a large exporter of energy, a large exporter of commodity in general. Europe and Japan are large net importers. But if you look at the dollar index, year to date, we're barely up, right?

It's almost like this shock should have been very, very dollar-positive, and that didn't take place. In fact, there was quite an interesting dynamic in terms of long-term investors purchasing euros and other currencies going through a negative terms-of-trade shock during very complicated times of conflict. I think that this is a vote of no confidence in the dollar.

Alexis de Mones: That's right.

Gustavo Medeiros: Similar to what we've seen in the 2022 Russian invasion of Ukraine. Back then, it was the weaponisation of the dollar system via the sanctions on Russia, leading to the beginning of a trend of diversification away from the dollar towards gold and other commodities and other currencies. This time around, I think it's questioning whether we can trust the US as the super military power of the world and whether or not the US reputation both within the Gulf region and more broadly will suffer from that.

Alexis de Mones: We saw the dollar was weak when Trump had a little adventure in Greenland. And the dollar was a little bit stronger, but not all that much, during this big adventure in Iran. So, yes, I agree that it pushes a lot of investors to question the long-term investability of dollars, or at least the weight of dollars in their portfolios. That's for sure.

Gustavo Medeiros: Yes. The US runs a large fiscal deficit. It runs a current account deficit despite being very positive in terms of energy demand and needs to attract capital all the time.

Alexis de Mones: For sure.

Gustavo Medeiros: Getting less friendly towards very large countries that have been historically over the last 15-20 years, in particular, large contributors to net inflow to the US does not help.

Alexis de Mones: It doesn't help.

Gustavo Medeiros: And I think that smaller countries that are adopting structural reforms tend to benefit a lot from that environment.

Stewart McAndie: Thanks. We've just had another question about liquidity. Obviously, you've mentioned both local and hard outperformed over the month of March, but can you maybe elaborate on whether you saw any changes in liquidity conditions during the shock, maybe through bid-asks or however you want to describe it?

Alexis de Mones: The bid-offer spreads definitely widened. The local bond curves widened quite a bit. So, you definitely have a price impact through the widening of the bid-offer spread. I mean, you can transact, and there were markets made in all of the products and the paper that we trade throughout. There was no disruption to the market in any country that we trade, which is the good news, and you have many, many more market-makers in EM debt today than you had maybe five, and even 10 years ago. So, the markets really are functioning really well.

In terms of liquidity, we even saw markets where historically liquidity dried up at times of outflow, like in Egypt, for instance, where there were some issues with getting dollars for people exposed to the Egyptian pound. This time around, certainly a lot of dollars were made available. The currency moved quite a bit because the central bank didn't intervene to defend it. And so, in those markets, that helps with the liquidity, but in other markets where currencies are defended or controlled more by the central bank, the volume you can trade in those markets is a little bit tighter. I'm thinking about Pakistan, where the rupee was kind of kept within a pretty small tight band, for instance. So, yes, it depends on the countries, but generally speaking, good liquidity over the last month.

Stewart McAndie: Thanks, and we've had a couple more questions about specific countries, but you've mentioned Egypt. Do you want to mention the type of countries or specific countries you can that we would look to avoid in frontier space in this kind of environment?

Alexis de Mones: I mean, there is a price for everything, but there are countries where the fundamentals are still unresolved. Some of the countries we mentioned earlier are not really getting on the right side of the IMF, for instance. Senegal is one approaching interesting levels, of 50 cents on the dollar. But they are in a situation that is still, we believe, deteriorating, with debt sustainability issues yet to be resolved, for instance. So that's one.

We're not planning on avoiding it as forever, and certainly there is a price at which we get involved, but we're not holding it today.

Bangladesh is another country where we're not involved. And at the moment, the market will continue really differentiating between different sorts of external vulnerability and fiscal room as well. So, these are not the better-placed countries, and they haven't demonstrated the willingness to embark on structural reform, which the great story in EM/frontier over the last three years is those countries that implemented reforms were rewarded for doing so. You need at least to see indications that these governments are willing to engage. That's critical.

Gustavo Medeiros: Kenya, perhaps another one to mention that has been haphazard.

Alexis de Mones: Kenya is as well another one where we're not avoiding it…

Gustavo Medeiros: As a rule of thumb, the closer countries are to the conflict, the larger their exposure to energy imports. In the first week of the conflict, people are so keen to buy the dip that day two, Egypt CDS traded tighter before the war. We had opportunities to lighten our position in these countries, not because we don't like them. I think Egypt had the right policy approach, and they probably are going to get out of this crisis in much better shape than prior crises. But it was a good opportunity for us to lighten exposure in places like Egypt, Pakistan, Asian high duration, and buy more exposure into the likes of Nigerian gold, etc. It was just a sensible, reasonable trade.

Alexis de Mones: Yes, that's what we did during March and even prior to the month of March, these are trades were started.

Stewart McAndie: I think we've got time for one more. There's one more question here specifically asking about the outlook for Mozambique and Gabon in terms of their interactions with the IMF. Do we have any view there, or do we have positions there in our strategy?

Alexis de Mones: We don't comment on specific positions. If you look at the fund, you can see, and if you invest in the funds, you can have a full report. We're not going to say too much, but Gabon is obviously an oil exporter and altogether a pretty good story from a macro-stability point of view. They do have a large stock of debt, that's the issue, but they don't have inflation, and that's certainly something that is to their credit. So, they need to work through that stock of debt, but it's sustainable, and we don't expect any accidents there. Mozambique is a different story. It's a repeat offender, bad governance, and multiple defaults in recent years. The bar to invest in Mozambique is quite a bit higher.

Stewart McAndie: Perfect, thank you very much both. Unless you have any final comments to make, I think that's covered everything. I really appreciate both of your time. In terms of what we've covered, we covered a lot of ground there. Obviously, frontier debt markets have performed extremely well both on the up-market and also in the last little volatile period, but we still think that they offer good yield and attractive opportunities.

Thank you both for the presentation and the discussion. To all attending, again, thank you for joining today's Ashmore webinar. If you have any other questions or would like any follow-up information, please contact your Ashmore representative. We'll be sending out a follow-up email with a webinar replay for your convenience, so feel free to share that with any colleagues you think will find this valuable. That concludes today's webinar. Thank you very much.