Stewart McAndie: Good morning, good afternoon. I'm Stewart McAndie, a member of the UK Ashmore Client Team. Thank you for joining today's Ashmore webinar, ‘The Turning Tide: Emerging Markets in a Shifting Global Landscape' Before we start, today's webinar is for investment professionals only, and not for members of the media. Any questions we don't get time to answer live, we'll follow up post the webinar. Today, we're joined by Dhiren Shah, our Head of Emerging Market All Cap Equity Team, and Gustavo Medeiros, Global Head of Research. Dhiren and Gus, welcome. Over to you, Gus.

 

Gustavo Medeiros: Thank you very much Stewart., I think we agreed to start this call with a quick wrap up. I'm going to give my two cents on the markets. Essentially, we've had quite a lot of volatility year-to-date, with the US stock market selling off. But other markets around the world actually are not doing that badly. European markets are doing well. Importantly, Chinese stocks are doing extremely well since September 2024, and emerging market (EM) stocks as a result of that, but also other idiosyncratic stories, are actually performing quite well, up year-to-date, and outperforming the S&P 500 quite significantly.

I think it is important that people realise in terms of signal that we've had a couple of policies that are long term in nature, that will be structural, and will actually change the market dynamics we've seen over the last 10 years. Within those years we’ve had pro-cyclical fiscal expansion in the US driving US exceptionalism. The US government would spend more and more money, and American companies enjoyed and took advantage of most of that. It's pretty clear by now, given the fiscal reconciliation bill that was sent to Congress and approved, there is quite a lot of line items that are cutting expenditure, and cutting expenditure in bits that are politically sensitive as well, like defence and entitlements. 

Therefore, when we put that together with tariffs, it's unequivocal that the current US administration is trying to consolidate its very large fiscal deficit that it inherited from the Biden administration. Yes, there's going to be a renewal of the Tax Cuts and Jobs Act, but that's an accounting item. We're not going to be seeing very large, fresh, new tax cuts. The new tax cuts are going to be marginal, and they should come with measures to compensate that. 

Against that backdrop, since September, we've seen a meaningful change in policy from Beijing, which we’ve mentioned in previous webinars. It started with aggressive monetary policy, and the People’s Bank of China (PBOC) allowing non-financial corporations to borrow money at re-lending rates to buy back their own stocks. But more recently, we've seen fiscal measures that are meaningful, particularly fiscal measures supporting new childbirth. So there's going to be a fiscal incentive down payment for people that have children. Obviously, whether or not that's going to lead to increased births, we don't know how to answer this question, we'll see. But it will increase the social benefits that are given to the lower part of the population, with a higher impact on the lower part of the population. There's also been discussions about providing higher income for retirees, particularly on the rural side, where people have a very low level of savings. 

Together with that, we've had a historical shift in fiscal policy coming from Europe, as Germany approved the EUR 1trn fiscal expansion to invest in defence and invest in energy. The European Parliament is also discussing how to re-appropriate EUR 150bn initially earmarked for the pandemic, for defence spending. They can leverage that apparently to get up to EUR 800bn. So if you add that altogether, the German package is equivalent to around 2% of gross domestic product (GDP) for the next 10 years, and the European package can add to close to that as well. So we're already talking about numbers that are bigger than the Marshall Plan, and potentially getting closer to the German reunification. That matters for EM, because EM countries benefit when the European growth impulse starts to accelerate. 

We think we're going to see more integration between European countries and the Global South, as trade noise increases and the US becomes more protectionist. So, there are key reasons here that the narrative which people are using to justify a lower S&P, in terms of institutional weaknesses in the US, and the noise and the uncertainty in regard to tariffs, those are very fair points, but those are uncertainties that we're going to have to deal with for some period of time. 

What I mentioned prior to that is the structural change in the direction of fiscal policy with meaningful impact for asset prices. Those are the elements that are justifying this divergence that we've seen. Again, worth highlighting those are points that we've been discussing already with clients for a while, and we've highlighted that as well in our 2025 Outlook. The US stock market had a lot of left skew in terms of its distribution of returns, whereas in the rest of the world, particularly in emerging markets, you have a lot of right skew. So, you have a lot more upside than downside when you look at risk-adjusted returns. I think that did not change meaningfully despite the recent divergence. Dhiren, anything you'd like to add here?

Dhiren Shah: Just to add, in terms of how I take that backdrop. I'd say that going back three, six months, the US economy expected to perform strong, 2-3% plus. Where we are today is we're in a slowing US environment, still growing, but it's slowing, and all the things you mentioned in terms of institutions, and tariffs, etc., and some of the uncertainty around that. I think what that means in terms of transmission, in terms of flows, and in terms of actual growth and capital, it means a weaker growth environment. The US Federal Reserve (Fed) has a dual-sided mandate, that means lower rates in terms of the trajectory. That then allows capital to flow into EM. That's the typical historical cycle that you see.

It's been interesting as well. You've obviously had the US equity market sell-off, and dollar weakness, which is an interesting dynamic. So that's essentially what's happening, that you've got capital then flowing into parts of EM. So I think that provides, from an overall standpoint, an interesting backdrop for EM markets to actually start performing after quite a few difficult, challenging years, and China's an important part of that.

Gustavo Medeiros: I think you touched on how expectations at the beginning of the year matter. Everybody and their dogs believed the US would keep on with expanding the fiscal deficit, and you'd see ongoing fiscal exceptionalism. The reality is that we've had a very different price action. So there is a scenario of lower rates in the US but higher rates potentially in Europe. This is going to drive the dollar weaker, and that's going to drive a lot of capital away from the US, and EM always benefits from that. 

There is also the situation that these fiscal policies are going to lead to, again, growth divergence. And talking about growth divergence, the asset allocators were not ready for this outperformance. And if fundamentals start picking up in the rest of the world against the US, there's going to be a lot of legs for assets to be reallocated. Now, perhaps we should shift to the country where asset allocators have the lowest exposure to, which is China, right? And everybody has been very sceptical given the backdrop that we've seen over the last years. But tell us about how you're seeing China in that, Dhiren, please.

Dhiren Shah: For background and for context, as we've said in the past, our view has generally been more constructive against that kind of market narrative. Some of the other things to talk about recently, which I think potentially parts of the market have missed, is that China's obviously expanded their own fiscal deficit. They’ve gone from 3 to 4%, for what is obviously one of the largest economies in the world. So, the fiscal policy there is more kind of expansionary. I think that's obviously a good setup in terms of attracting capital. 

The second thing is, if you think about asset allocators and so on, what's given us more confidence has been what companies have been telling us. First of all, earnings expectations have been improving, so companies are reporting good numbers. If you look back over the last year, the view has been very much, and all our interactions is that Chinese companies remain amongst the most innovative, among the best in the world. They're very entrepreneurial, and they've increasingly got a global mindset. But that was true in 2020, and more recently, clearly the economy slowed. You had regulatory tightening, and the narrative changed.

And the narrative changing from "China's not investible" provides an excellent backdrop for stock market returns. It tells you where people are invested and where they're thinking. And, in more recent years, some of that innovation has been clear for the world to see, be it electric vehicles, be it in solar. So that's really been there, and it's been part of the industrial strategy, a very deliberate policy of just how China works, in terms of there's a number of areas that they want to lead, they want to dominate, and you've seen it play through. 

One other thing is, even when the economy was slowing, and what produces a really nice setup is, companies were still growing at a decent clip. They were having margin expansion, they were having buybacks. Stock markets were really cheap. It was almost puzzling at times why the markets were giving you this opportunity to buy some of these excellent companies at very, very cheap multiples. And then we had a catalyst, right? This is obviously DeepSeek, in terms of the Chinese large language model (LLM). So it was the area where the market was fixated on the US, and the expectation was only US companies would dominate, and suddenly, we had that DeepSeek moment, which everyone knows about, demonstrating that even with constrained resources, Chinese companies are as innovative as they are in the US. 

That's provided a huge backdrop for a lot of these artificial intelligence (AI) companies, or companies that have got some form of AI exposure to suddenly perform well. For us, we think some of this is overblown. There's two types of AI, there's training and inference. This is about inference, and the Chinese are doing it very, very well. But there's lots of companies doing this in China. That normally means this is not going to be somewhere you're going to make a lot of money, just doing pure Cloud AI. But the companies that use AI in their business models, from advertising, from delivery, from e-commerce, these sorts of companies will use it to improve their margins, improve their monetisation. So that's where it'll provide a really attractive backdrop. 

From a country level, I think it's also quite interesting, because what China probably does best is using AI on a national scale – companies, but also across the government, across provinces. There's now a mass rollout of AI in China. What that means is huge productivity gain, and total factor productivity growth. The markets love narratives, one reason being demographic challenges, and so on. For equity markets and margins, productivity growth is the key, and that's what drives returns. I'd expect in the coming years, as AI gets rolled out, the most significant impact globally will probably be in China. There'll be a huge bonanza that comes from this. That's something which I think potentially the market's not fully appreciating.

In terms of what's happening more recently is this has coincided with some of the policy changes that you talked about which took place at the back end of last year. We've had an issue with confidence at the business and the consumer level. The point to note is that China’s policymakers have, very slowly, but incrementally changed towards recognising the challenges on consumption. So whereas the last three years, all the policy meeting goals were about national security, technology independence, industrial goals, the number one priority, interestingly, as of last year, has now moved to consumption. 

This is a notable change, and what it means is over time, you're going to see a number of policies being rolled out. What they've done so far has been interesting in terms of subsidy programmes and so on, but it clearly hasn't been enough to move the needle. We expect a lot more to come over time, and obviously we need to then see the efficacy of that execution. 

This provides a very interesting opportunity for companies, because these companies have been operating in China during this slowdown. If you get an improvement in economic growth, you get huge operating leverage. So when economies slow and economies accelerate, the market always misses both margin compression as well as margin expansion. We're seeing some of this already. Also, companies are investing more. So, I think this is the early signs of business confidence starting to improve, be it an AI or so on. And so this is that 'animal spirits' starting again. I'd say the macro backdrop has definitely started to become more constructive. We've had a quite a positive view on the China tech space, and increasingly we're getting more constructive towards some of the consumer areas within China as well, as these stocks haven't moved, and they still remain very attractively valued.

Gustavo Medeiros: That's very good. Thank you, Dhiren. I think there are a couple of points you make that are worth highlighting, because it takes some time to let it sink in. But ChatGPT was announced, what, two years and a quarter ago, or something like that? Since then, well, up until at least the end of the first half of last year, we had a frenzy that everything that was AI-related in the West actually had a tremendous moment. And tremendous momentum. Now we're starting to see that happening in China.

But when you're looking to adoption rates, China is actually much, much faster to adopt these kind of technologies. And as you said, what is happening at the moment is very interesting and encouraging. The other interesting point I'll highlight is how China everybody's been worried about the real estate slowdown in China. At the same time, they've been dominating the industrial base. China now exports more electric vehicles (EVs) than Germany, than Japan, than anybody. They dominate that space. And they're looking to do that in other industries as well. If you look at the earnings per share, it's been actually flatlining and improving since late 2022. And the market kept on getting more and more discounted. So, this contrast between the high valuations, super-hyped AI space in the West, vis-a-vis in China, and how that flips and where valuations are, is a very big opportunity. 

But talking about AI, there is an element that suggests some caution on the semiconductor space, when you're looking to the shares as an ultimate leading indicator. The stocks of semiconductor companies have been a bit wobbly over the last six months or so, and that typically brings a downturn. We've seen some headlines more recently as well. That's been an industry that I've been focusing on, and excited about opportunities. Tell us a little bit more about how we are adjusting the position around that, please.

Dhiren Shah: For background, we've had a very constructive view on semiconductors, and a lot of that was in Taiwan, given you've got unique monopolies, duopolies, at a global level, with pricing power and so on, and these companies obviously performed very well over the last year. I mean, there's a bit of misunderstanding in the markets right now. When you think about AI spend, there are two categories. One is obviously the training, and second is the inference. DeepSeek has made the inference part exponentially more efficient. But there are other companies in the West that are also doing this. This is very much part of the long-term mantra of, you need innovation, you need costs to come down, so that each search you do on ChatGPT, let's say it costs a hundred lessons, so it can be rolled out more broadly. This is a natural extension on the training side. These where you're looking for the Agentic AIs, the very high superpower AIs. 

The race for that is still going on. So that's why the USCSBs are still spending considerable sums, and it is almost strategic for them to continue to do. Having said all that, there are clearly large numbers in terms of capital expenditure (capex), and so the pace of growth will moderate going forward in that AI space. What that means for us is that some of the best returns are behind us, but it's still a space we're constructive on. 

Within semiconductors, there are sectors which have been a bit left behind, and those are traditional areas such as PCs and smartphones. These are the sectors that we've written about in the past where, as AI is rolled out, this will benefit some of these segments, as you get features which are AI-enriched, making a difference to a collection of segments, where I think I say the average iPhone life is four to five years, So this is starting to be rolled out, and some with the smartphones in China, but very, very early. So, there's another cycle there that no one's been investing in, and so valuations are cheap, and we think there'll be a three, four-year cycle there. We've pivoted some of our exposure over the last six to nine months to find the next set of opportunities.

Gustavo Medeiros: Excellent. Well, talking about structural growth and structural stories, maybe we should switch gears a little bit and talk about India, which has been a market that in our previous webinars, we've been saying we're cautious on, a bit underweight because of valuations, and because of the fundamentals. Give us an update, please, because obviously as China rallied, there was a bit of a short covering in China that led to people getting out of India. How is the market positioning, and how are we seeing it? Dhiren, please.

Dhiren Shah: Yes, our take is similar, but slightly different. There's been equity market bubble, and you can meet in multiples, you can get liquidity retail participation. There's many, many ways you can verify and validate that. That's almost factual there. 

What's happened at an economic level, and this always goes into the narratives the market wants to believe and perceive, is that India was expected to have this new, wonderful period of growth. The reality is it's kind of quite similar to the past, which is a good number, but just not the number that everyone was expecting. So, what we saw the back end of last year was actually we saw economic growth slow down in a number of different areas. This goes from auto sales. And it's interesting data statistics to look at. You'd think these numbers are growing at 10%, but actually some of them are down, negative numbers. Companies were missing numbers. There's been a lot of regulatory tightening in microfinance, some stresses picking up. And so the on-the-ground reality, and we've had two team members including myself travelled there in the last six months, has been weaker than what the headlines would at least, or the sales side, has been expecting. 

So that, combined with the speculation of valuations, is one of the reasons why the markets have sold off. We were in a situation where markets were two standard deviations and expensive, we're now down to one standard deviation expensive. So valuations have come down, and that provides selective opportunities. But at an aggregate market level, this still looks pretty pricy to us. 

And it's interesting from a manufacturing standpoint. So this business expectation as capacity gets reallocated from China, goes to India, and so on. We speak to a number of manufacturers, and some will have operations in India, but what there increasingly is, well, there are other parts of the world they'd rather be in, be it Southeast Asia and so on. And the ecosystem in India means the rules of operating in that country are not as straightforward as people had expected them to be. Now we've had a slower economy with a couple of quarters of earnings cuts and weakness, and that seems to be carrying on. We've also had a regulatory change in terms of the regulator of the Reserve Bank of India, and we'd now expect much more dovish policy actions. So there's some tightening over the last couple of years, which potentially has led at least to some of this. 

From here on, especially as inflation has moderated, we'd expect rates to fall, but also there's a number of macro prudential measures which have been introduced, and we expect to continue to be introduced, to lead to credit extension picking up. I think that sets the environment up for a more constructive liquidity environment, and for the Indian economy to pick up, but we think it's not going to be straightforward. It'll take time to pick up. When you have some of these slowdowns, they don't suddenly just snap back, they tend to take a number of quarters. All of that gives us reasons to remain cautious. Not as cautious as we once were, but still this remains an underweight market for us.

Gustavo Medeiros: Yes, I think it is a good reminder of the importance of discipline, right? And looking into structural opportunities for what they are, and for where it can monetise. Timing is going to matter a lot because even though it remains a position that structurally we like a lot, as Dhiren mentioned, we need to find better valuations now. 

Let's flip a little bit to other EM countries. I think there's quite a lot to talk in Latin America, and the two big ones, Mexico and Brazil. Obviously, Mexico, tariff is front, left and centre, the most concerning element. I have a personal view that the tariff to USMCA is mostly noise. Because you can see basically all US corporations that do manufacturing in the US, they have some sort of links to Mexico, to a very, very large extent. The correlation between manufacturing employment in Mexico and the US is very, very high. Therefore, if Trump wants to get out of USMCA, the adjustment for the US would be very, very severe. It will also be very inflationary given the high level of imports of food from Mexico, particularly during the winter, for example. That's very, very politically challenging straight away. But obviously, Trump is negotiating on his own tactics, and there's a lot of noise. He likes to talk about it every day, and the market is good at picking up his cues and writing the headlines, and then giving more volatility. Tell us what you're thinking about that, how you're positioning the portfolio, Dhiren, please.

Dhiren Shah: I hate to agree with you, but generally I share similar views. When we speak to companies, and you see the difference in labour costs, and the reality of operating an integrated kind of supply chain. It's all the things you spoke about. So, interesting anecdotes. You compare the same mid to high-end job in the US in engineering versus in Mexico, the salaries are four times higher. Also you can't find the individuals – there's a shortage. So the reality is, whilst there's a high-level objective to bring back operations to the US, the operational reality of doing it will be far more challenged. 

I mean, there's a broad understanding within large segments of US manufacturing that Mexico is very much integral to bringing manufacturing back to the US. The US does the high end and, call it the low to mid end, this happens in Mexico. So that's our central thesis. Then, going back to one other thing to talk about, what's priced in. We had been cautious for a lot of last year, particularly the back end of last year. After a lot of this news flow got into the market after the US presidential elections, the currency sold off and the stock market sold off. But that was an interesting opportunity to start to rebuild positions. 

But given the news flow, given some of the uncertainties for us, it's not expressed in the maximum way, and obviously we're mindful of this US slowdown. The other part within Mexico, which I think is almost as important, but that's lost current emphasis, is we've had elections in Mexico as well. This did cause quite a lot of initial angst in terms of Morena Party continuity, having gone from former president Andrés Manuel López Obrador (AMLO) to Claudia Sheinbaum. 

What we've been able to read and understand so far, in terms of speaking to companies consultants, and so on is, Sheinbaum's more pro-business. So there's less antagonistic behaviour. I think that presents a lower equity risk premium within the Mexico market from a regulatory standpoint, something that was very much present in the last four to five years. The change there is actually quite constructive and positive. What we need to do now is, over the next, let's say, months, quarters, is to get through where we are in terms of tariffs, and then you've got a currency which is obviously now attractively valued, and a stock market which is two standard deviations cheap. So the setup to make significant returns in Mexico is definitely there.

Gustavo Medeiros: Absolutely. I've been banging on about how the peak Mexico bearishness was going to be on the day of the US election. That's been more or less how it's playing out. There were three tariff threats, and the volatility of the peso declined under the three of them, even though in the last one, President Trump actually imposed 25% tariffs for a couple of days only. So I think that's also another pretty good signal. I'm not going to give a big preamble about my own home country. Instead, I’d love to get your thoughts on Brazil, please.

Dhiren Shah: Brazil's amazing, because we're 18 months away from the presidential election, but the only thing that matters is elections. So, just from a bottom up standpoint, because we'll stay on the things where we've got the highest conviction and the highest visibility, the bottom up opportunity remains excellent. 

Obviously, Brazil has always had very good companies. What you've also got today is an excellent valuation backdrop. There's a collection of companies that continue to still deliver good numbers, growing the businesses, invest, and so on. But you can buy them now close to all-time lows. There's obviously been a bit of a rally, but still very attractive valuation levels. Locals have been investing in fixed income, given interest rates have been up, so the change has been after the back end of last year, when the market had a credibility issue with the government's plans. Interest rates in terms of the curve are 500 basis points higher, and so the locals invest in fixed income, and that's obviously causing growth to slow down during the year. 

Whenever you talk about elections, you have to say there are some uncertainties. Clearly there always are uncertainties with Brazil, and it's 18 months away, and we don't know the candidates. But in terms of the incumbent, Lula, his disapproval ratings have been increasing. That obviously poses challenges to his re-election. And so the probability of change is increasing. I'd say 60-40 in terms of we've moved to a centre-right candidate. But if you do move to a centre-right candidate, it's quite easy to fix in terms of the equity risk premium falls, rates fall. And then you've got point almost where China was last year or so. Because you have an opportunity to make substantial returns. So there is some uncertainty there, but there are reasons to be having exposure to Brazil, but in a very selective way.

Gustavo Medeiros: Yes, I would just add very quickly on the macro level, people are really worried about the ability of Brazil to implement a fiscal consolidation. But I've got to bear in mind that Temer, when he came, on the tail end of the Dilma administration, he consolidated the fiscal deficit with growth at 0 to 1% rate. And his structural reforms actually brought higher structural GDP growth. So in that environment, it's actually much easier to actually implement fiscal consolidation that any new governments are going to count. Because it's all about constraining, expanding vis-a-vis, the nominal GDP growth.

And obviously, as you pointed out, there is a lot of room to cut interest rates. 10% real interest rates is something that is quite bizarre in today's. And it's to do a little bit with the inflation target, which has been declining a little bit too fast, particularly regarding where fiscal policy was. So I agree with you. If there is a political transition, it can make the case that interest rates can decline a lot.

And by the way, earnings yield in Brazil is close to 13%. Which is 2% below the 10-year government bond. But that's ballpark where it has been on average over the last 20 years. It's not even one standard deviation expensive vis-a-vis bonds. So if bonds decline, there will be a re-rating that is going to be faster than people expect. And as Dhiren said, people are starting to anticipate it because Lula's approval rate has been cratering. Dhiren, any other countries you would like to mention? Obviously, there's been some noise and shenanigans around Indonesia, and uncertainty I would say, perhaps.

Dhiren Shah: Yes, Indonesia’s economy is among the fastest growing in EM. We’re talking 4 or 5% GDP growth, low external debt. So there's a lot of things to like. What you've gone through is a political transition from President Joko Widodo to Prabowo Subianto. And there's just been a lot of uncertainty with the market in terms of what that means. Plus,  we had a new sovereign wealth fund being created. We've had announcements over the last week of some credible external advisors, including Ray Dalio and a few others. 

There are also big concerns the military will increase its role in society, even at bank AGMs. There's a big concern of military people sitting on bank boards, and none of that's happened. So there's always rumours and speculations in EM, and a lot of it has just been noise. There clearly are some small changes going on with the economy, and that happens whenever you have leadership change. But from everything we can work out so far, it's small. What that does, it presents an interesting opportunity, and so we think there are some still interesting stocks which have sold off significantly. You've got some very good valuations with companies that are essentially not really unchanged from where they were six months ago. 

The other EM market to mention as well is within the Middle East. We find the United Arab Emirates (UAE) to be very interesting. Probably the most constructive I've been in my career. There's a lot of dynamism there. There's a lot of human capital being sucked into the region, and it's a very attractive place to be. That provides a lot of interesting opportunities, and obviously the economies are growing very robustly. So yes, those are some of the other interesting highlights we see.

Gustavo Medeiros: Excellent, thank you, Dhiren. Any other questions we have from the audience, Stewart?

Stewart McAndie: Yes, thank you guys. You mentioned the US in terms of growth slowing. There's a question relating to how are we thinking about US recession risks, and how that'll impact EM? And also there's a follow-on question, in terms of if that does happen, will the world be able to replace the US market, which is the principle driver of growth, or will we just see overall lower growth, and how will that affect emerging markets?

Dhiren Shah: Our starting point is obviously there's a slowdown. I still think we're a long way away from a US recession. But I guess the question is, what happens under a recession scenario? Obviously, starting from Gus, the outset is, you've got Eurozone, a bit more pump-priming. You've got more going on in China. And, in terms of what we do from a portfolio scenario, if we saw such a scenario, that means obviously reducing exposure to some of the more global cyclicals. I think when you have a change in terms of growth cycles, it's difficult to immediately replace the US, because it is obviously the largest economy in the world. So that means less constructive on cyclicality, and more exposure to domestic economies. China's one of them, but I've mentioned a bunch of others. Indonesia, Brazil, India. So these are all countries which are domestically driven, and so they're a bit more insulated from what happens in the US.

Gustavo Medeiros: I would say if you put on a strategist hat, and if you look at the 10% market correction that we had, and look at over the last 60 market corrections over the last century or so, to suggest that there's a 50-50 chance of a recession. So you've got to be humble and say, "yes, the odds of a recession have increased." But when you're looking to the data, and what is happening on the ground, there is no evidence yet that this slowdown is significant. The hard data is not budging. 

There's a lot of issues with the confidence data, the soft data surveys, because it's very political, and given the partisan nature of how Democrats are really depressed about the economy, the Republicans are really excited. So there's quite a lot of noise in the soft data that financial analysts traditionally use as the ultimate lead indicators.

I would say that the odds of a recession are not 50-50, they are smaller than that. Things could deteriorate depending on the policy. So we are very alert, as Dhiren mentioned, and we are considering that. The good news is, again, with Europe and China ready to actually support more fiscal policy dynamics, that could actually present some cushion in terms of global economic activity. But yes, if the US goes into a recession, everybody's going to suffer, right? And if the US goes into trade policies that don't make any sense in economic terms, it's going to be painful for everybody. We think there is more noise so far than what we actually can see, and put too much money behind that. There was a second part of the question, Stewart, did we answer it all?

Stewart McAndie: I believe so. There's another question about Trump's policies. And obviously I know it's difficult to predict, but it is asking if we believe or if we are thinking how they may change later in the year when he starts to focus on mid-term elections.

Dhiren Shah: Probably Gus is going to be better at answering this than me, but I'll start. It doesn't stop me having a view. If you think what import tariffs do, they're often attacks on the poorest people in society, right? So there's a huge Republican vote bank intertwined within that. And so…initially appealing as high taxes might be, it's not always well thought as we sometimes think it might be. 

There are a number of policy mistakes that happen across the world, and I think this is an example of a policy mistake. I would imagine over time the rhetoric on tariffs will not be as aggressive as where we are today. How much of it is negotiations and so on, I obviously don't know. We all have pretty similar views on that. But I do think just from a pure economic standpoint, it doesn't make sense. I would expect as you get closer to votes and politics, that means potentially for a change of environment. So it's a very good question, it's just something that the market will start thinking about at some point.

Gustavo Medeiros: I think that's precisely why Trump started with the more unpopular measures first (tariffs, etc). And then he wants to do more of the deregulation, renewal of tax cuts, next year. But also, if you think about it, tariffs are a sales tax, where the foreigners pay for part of that.

Structurally, the US was running a 7% fiscal deficit with the economy at full employment. That's unsustainable. The market was putting a pretty big risk premium on the long end of the curve, that would only deteriorate if they kept on trying to double down. So they understood they needed to do a fiscal consolidation. The way to do fiscal consolidation is, you start front loading, and do the bad, tough bits in first year, and then you actually let your expenses grow, but they grow at slower pace than nominal GDP, so then the fiscal consolidation keep on going. I think that's a sensible framework. 

I think the people responsible for economic policies within the Trump administration are sensible people. And I think that, yes, the problem is, the amount of noise that comes with that as policy evolves, and the way they use that as an instrument to achieve other objectives. 

But the tariff element I expect to be not very massive, one that wouldn't distort. There is a formula where you can raise close to 1% of GDP in tax revenues, with a relatively small impact on inflation, if you don't overdo it particularly on the final goods. You know, food and consumer goods where you don't have an alternative or a replacement. I think that's what they're going to be aiming for. They're going to try to raise between 0.7 and 0.9% of GDP in tax revenues, more or less permanently. Whatever is above that is going to be noise, and is going to be an instrument to get something else. 

And then in 2026, Trump is going to be ready to hopefully get announce the good measures, in terms of deregulation, in terms of renewal of Tax Cut and Jobs Act, and hopefully you get a market bounce back, and going into 2026 in a better mood. But if Trump makes a mistake, there is a history, you know, he's a big fan of McKinley. If you look into history, McKinley actually lost a hundred seats, the biggest defeat of the Republican Party in an election, because he actually overdid tariffs. I think again, as Dhiren mentioned, the administration is aware of these dynamics. They're aware they got elected there partially because of inflation and immigration. And, you know, it's unlikely they'll overdo it.

Dhiren Shah: One thing just to add on that is, we think about institutions and checks and balances, and why they matter – they lessen the chance of policy mistakes. We live in a world of EM, and so over my career, we see this happen. And policy mistakes happen across the world when there are less checks and balances. Currently in the US, there are less checks and balances, so the chance of policy mistake does increase. That's just something to be aware of, and it's the experiences that we've had in EM. 

Stewart McAndie: The final question is about flows. Are we seeing any evidence of flows coming out of the US towards emerging markets?

Gustavo Medeiros: Why don't you answer that?

Stewart McAndie: We'd like to see more. In terms of market, obviously we've seen the divergence in the equity markets, but are we noticing more flow coming into the markets?

Gustavo Medeiros: Here’s the two cents I can give. If you look at the data, the flow numbers that we have are EPFR. If you look on EM debt specifically, EPFR has been showing outflows over the last three years. EM debt has been the best performing asset class within fixed income over the last three years. What is going on here is that quite a lot of clients are putting money to work directly, and in some countries, specific mandates. We've been seeing quite a lot of this activity within our franchise, I believe, given the last year's results. 

And a lot of clients are deciding to put money to work more or less passively. That would be final clients. When you're looking in the surveys or anecdotally, the big asset allocators have been really overexposed to the US stock market, and to the US capital markets in general.

So I think that this rotation has been happening in pockets, i.e., you know, managers that have global mandates, that can buy a little bit of EM at the margin, they have been buying EM, and they've been benefiting a little bit, at the margin. That's already benefiting the asset class. 

But the reality is that what we typically need for asset allocations to shift, is a two to three-year outperformance of the asset class, and then the underperformance of the assets that you're holding, right? That two-to-three-year outperformance of the EM asset class, that's already happening. Now in the equity space, we're starting to see the relative performance of the US faltering, since last September/October, I think EM has been outperforming. So I'd expect with a lag, we'll start to see more flows. Maybe Dhiren has some thoughts on it, but that's my personal view.

Dhiren Shah: I don't think I've got anything more to add. But yes, that sounds sensible.

Stewart McAndie: Great. Thank you very much, both of you, for your time. And to all attending, thank you for your joining today's Ashmore webinar. If you have any further questions, please contact your Ashmore representative. Thanks very much.