Stewart McAndie: I'm Stewart McAndie, a member of the Ashmore UK Client Team. Welcome to everyone and thank you for joining today's Ashmore webinar, Enactment Day: What Tariffs Mean for Emerging Market Debt and Equity. If you have any questions, please enter them via the live Q&A box on the screen and we'll address them at the end. Any questions we do not answer live, we'll address post the webinar. 

Today we're joined by Gustavo Medeiros, Ashmore's Global Head of Research, Edward Evans, a Portfolio Manager in our equities business, and Alexis de Mones, a PM representing our Emerging Market Debt team. We'll start with Gustavo with some macro thoughts following the recent tariff announcements. Gus, please, over to you.
 

Gustavo Medeiros: Well thank you, Stewart. Thanks everybody. We have been of the view, as you know, that tariffs have broadly two objectives. The first one is raise revenues for the United States (US). The US has a very, very large fiscal deficit that needs to be addressed. And the second one is a tool for bargaining in negotiating. And when it comes to negotiation, there are three objectives, reciprocity, rebalancing, with no objective rebalancing of trade levels, potentially national security concerns, which has been brought up initially on USMCA, but also with China. The third one is obviously potentially using currency to rebalance global trade levels, right? 

So, 'Liberation Day' was actually a shock to markets because Trump threw in the kitchen sink, announcing very, very large tariffs. And the formula that Trump used didn't make economic sense at all. But basically Trump looked at, or the Trump administration, looked at the trade deficit to US imports from these countries. So it seemed like the objective was to put tariffs at very draconian levels to close the trade deficit, which would be a tremendous impact to the global economy if it would happen, right? As discussed before, tariffs at very aggressive levels would represent a recessionary shock to the US economy with inflation together. So it is a very stagflationary impact on the US economy. To the rest of the world that would be recessionary as well, but it's likely to be deflationary as these exports have to be redirected to the rest of the world. 

So, the market impact – not only on the stock market but also the US Treasury curve steepening over the last two days  – likely has swayed Trump's decision to actually U-turn, particularly on the tariffs on the rest of the world. Today only 10% tariffs across the board have been implemented with the "reciprocal" tariffs, that formula that I mentioned initially, being no longer at play. Nevertheless, Trump has aggressively kept very aggressive tariffs to China, and the Chinese decision to retaliate against the tariffs initially has led to a tit-for-tat escalation, whereby the US is now putting tariffs on China at 125%. Given how important trade between China and the US is, that still represents a pretty large disruption to global trade. It still brings effective tariffs to a very, very high level, which would actually be disruptive both to the US economy and the Chinese economy the most, but with significant spillovers to the global economy. 

China is preparing a fiscal bazooka to compensate for it. The fact that they let the fixing of the RMB, bringing it slightly above 7.20 is not a signal that they are willing to depreciate the RMB to compensate for the tariffs, but in our view means they're willing to get themselves some degrees of freedom for monetary policy to be allowed to be eased further from here. If that is bringing a negative impact to the currency at the margin as a result of monetary policy easing, so be it. 

But the most important policy measure likely to come from Beijing is a much more aggressive stimulus on the fiscal side to actually support local consumption. That is a measure aimed at compensating for the large losses from exports. Overall, we still believe effective tariffs are likely to be in the 10-12% area. Anything above 15% effective would be very disruptive for markets. And with tariffs in place with a 10% across the board, the 25% tariffs and aluminium and steel, the 25% tariffs non-USMCA compliant items and the 125% tariffs to China, effective tariffs are still far too large and therefore we're likely to see markets in some sort of volatility in the meantime. 

Having said that, remember China has front-loaded exports to the US by around one month to a month-and-a-half. So there is some room for negotiations to take place before the effect of the tariffs are felt on the economy. And for now, the main impact that we're seeing is on sentiment and that is why we're seeing such a very aggressive market reaction to that and why volatility has been elevated. 

I think overall it's fair to say that over the negotiation period of the next couple of weeks we're still likely to see volatility elevated. Within emerging markets (EMs) though, asset prices started at very low levels on both equities and fixed income and the tariffs actually created the volatility. It's fair to say that EM has been outperforming global asset prices both on the equity and the fixed income space. And in our view, this incoming volatility is likely to be an opportunity to look into adding exposure both into equities and fixed income. But I like to get some more granular thoughts from my colleagues on the equity and the fixed income space, and, in terms of what has happened, in terms of price movement and our view going forward. So, back to you Stewart.

Stewart McAndie: Thanks Gus, we can come back to some more questions surrounding the macro, but we'll turn our attention to equities now. Edward Evans, can you give us a bit of a feel for what's happened at the index level, but maybe who the winners and losers have been and thoughts about how this may play out going forward?

Edward Evans: Yes, I think in terms of price action, market leadership from the US to EM had already begun to change from last November time. That at first, of course was triggered by what I'd call much more of a technical-led correction. You had acute investor concentration in the US, you had very inflated valuations based on very full gross domestic product (GDP) and earnings expectations with little room for disappointment. Since then, of course, you've seen much more visibility as Gus has alluded to, of the US orchestrating an economic rebalance and abrasive trade protectionist policy. So that has led to indiscriminate price action, and also excellent, albeit highly selectively, investment opportunities. 

As we're speaking right now, EM is seeing its sharpest rally since 2022, supported by EM FX while S&P futures look to be rolling over. 

Now to your second question, who's most and least impacted by tariffs? At the very, very highest level, I think Latin America (LatAm) stands out as being reasonably the least impacted and perhaps Mexico near the top of that list, given the USMCA framework, given the US's strong sphere of influence, given the strong degree of interconnectedness between those powers. This has been an area we've generally exploited. 

So the front-loading of tariff risk earlier in the year, we used that a lot to incrementally and selectively pick off very high quality assets at extremely undemanding valuations. I think just as we go forward, I'll just be mindful of second-order effects in terms of the degree and pace of a US slowdown, but Mexico, should all else equal, come through this quite well. 

I think Brazil is similarly well positioned in terms of reasonably limited direct trade of manufactured goods with the US, and having a much more domestically-focused stock market. The potential there, of course, as we all know, is for interest rates to come down from some of the highest real rates in the world and trigger a sharp rotation towards undervalued equity. That still remains a very promising next leg for that stock market. 

Argentina, of course, primarily is much more idiosyncratic. A final International Monetary Fund (IMF) deal looks close to being sealed. So again, that provides a more sort of incremental, largely self-help story. 

Moving across to Asia. Now, of course Asia stands out as being most vulnerable to a trade shock. It's the home of several more traditional export growth model economies. But again, I'd be a little careful here, it's too easy to tarnish all with the same brush. If you'd run through some of the countries like India for example, it's only got a 1% trade surplus with the US for manufactured goods. It's got a very largely insulated economy. The stock market is very domestically focused. So, in terms of second-order impacts, India is a net beneficiary of all price weakness, although it would be more negatively impacted should we see a loss of US corporate confidence impacting budgets and some of the services spend. I'd watch again closely for second-order impacts, but at a high level, a lot of the large cap, high quality corporate excellence, has been indiscriminately sold off recently. And I think you are being rewarded, you're being overly rewarded, to take advantage of that and to invest. 

Now turning to China itself, Gus has already covered this in some detail, but I guess the key point here is that China was already supporting its economy, and already is increasing its fiscal deficit. I think all else equal, it's only likely to see that accelerate, per the earlier comment. 

China has spent a significant amount of firepower, of capital, of building out automatisation, energy transition, artificial intelligence (AI), and already I think the next step was squarely focused on building out domestic consumption. I think the way they will do that will be in tandem with leading edge technology, AI, already the DeepSeek announcement and incorporation of that, I think you'll see a factor of productivity growth story coming across China. And the latest episode vis-a-vis with the US will only reinforce the importance of China becoming much less reliant on others. 

I think breaking it down within China, of course, that the primary materials, commodities are clearly much less attractive, much more vulnerable to tariffs. Meanwhile, in the  technology-related consumption areas in particular, these are very high quality, leading companies, trading at exceptionally undemanding valuations. So we need to look for opportunities as we go. 

In terms of other parts of the world, I can't cover them all off, but if I went briefly across to the Middle East. So there again is a high degree of heterogeneity, Qatar stands out as very much insulated. It's got a very high quality funding source for an economic diversification programme and a capital market development programme, so that stands out particularly well, I would say. Kuwait again, no debt, pro-reform mindset, again should come through this period particularly well. The United Arab Emirates (UAE) obviously I think over recent years now has really transitioned from being much more or much less cyclically vulnerable to being much more structurally underpinned and a lot of the stock market opportunities reflect that. So again, I selectively through that market there should be strong opportunities. 

If you consider at a more industry level, well clearly global cyclicals look least attractive, all else equal, whereas domestic idiosyncratic companies, industries more underpinned by structural growth drivers, are clearly much more attractive. Let's not forget that emerging markets at an aggregate level is not the emerging markets of 20 years ago. So cyclicals represent about 15%, maybe 17% at an index level – and that's halved over the last decade or so. 

Meanwhile, more sustainable or enduring, more visible growth-driven parts of the market – so consumption, tech, communication services – that's more than doubled. So it's about 55% or so of the index. So EM's overall vulnerability to global cyclicality is much, much less than in the past. 

In terms of your final point, of where we end up in a few months from here, once the dust has settled? Well, I think it really goes back to where I started. The US economy will slow. The question is just by how much. Now, clearly a more bearish sharply destabilising, sharp US slowdown is unhelpful for all. I think the base case remains for a much more gradual incremental orchestrated slowdown. And that scenario, it is much more supportive I think for emerging markets. 

I think the playbook is consistent with history and so too will be the transmission mechanism in terms of US growth essentially slowing while EM growth being resilient and outperforming, outgrowing. EM FX, benefiting from capital flows, EM earnings narrowing their gap with the US, or even reversing it, so outgrowing. 

If history's any guide, they are the three key ingredients to see along with, no more US dollar strength, they are the key ingredients to see a very powerful emerging market, stock market rally from here. So, this whole episode has come at a time where investor allocations to EMs are very light. Absolute valuation levels in EMs are very much undemanding now, and at a relative level they're still at a stark discount to the US market. 

So, I think investors need to be active, they need to be nimble, they need to essentially exploit the opportunities that such dramatic price action is offering.

Stewart McAndie: Thank you, Ed. So, we'll now turn attention to fixed income markets. Over to Alexis, can you give us an idea of where we believe or where we see the impact across the EM debt market complex, please?

Alexis de Mones: Yes, thank you Stewart. I'll start by saying is that this is really a recent crisis that was made in the USA, that's impacted the USA more than other markets. The point has been made. 

From our standpoint, we feel that the impact on external debt, and local debt in particular, and corporate debt has been quite muted. So you haven't had the sort of a contagion to EM, which would trade at a multiple of the developed markets during this episode of sell-off. If anything it was extremely orderly. 

So, month-to-date, to just give you a couple of numbers, the sovereign external debt market is down just about two points. So that's month-to-date. In the investment grade (IG) space, it's been very orderly, I mean we're only trading nine to 10 basis points (bps) wider than the start of the month, but 20bps wider than the start of the year. So it's really a small move upwards. 

In high yield, it has been a little bit more volatile as you would expect, about three points down since the start of the month. And in terms of spread, only about 120bps wider since the start of the year. So these are relatively muted moves, it's only in triple C we've seen bond prices really fall quite a bit more, particularly Sub-Saharan Africa. But now we're seeing a pretty, pretty good rebound in those names. 

So, in terms of say the ‘yieldiest’ part of our market, the high yield part of the market, that trades at 11% yield-to-maturity today. We've retraced between say a third to half of the falling prices that we've seen since February, which was really the recent high. So we're trading much better, but there's still a lot of value there. So we haven't recouped entirely some of the losses from the credit spread widening, which leaves the yield of the asset class today quite attractive, 8.3% yield-to-maturity. But 50bps higher on the month as of today. So at good buy levels, I think sovereign EM debt at the 8% yield and above is definitely has been a pretty good buy level over the recent couple of years. And that's a signal that investors should pay attention to. 

In terms of the investment grade trading at 6% yield, high yield 11% yield. Within the recent sell off, there was two concerns. There was tariffs and there was really the fall in commodity prices, oil in particular. And at the beginning, the initial move was quite indiscriminate and you had oil importers and oil exporters and all tariff names and non-tariff names selling off pretty much in line. Then you've started to see some of the energy exporters like Nigeria, Angola, Ghana, they were obviously quite impacted, but even the energy importers like Egypt or Türkiye were quite impacted. And then in the more recent phase, what has happened, you've had a lot more discrimination for quality and the energy importers have rebounded quite a bit more strongly. For instance, again, Egypt and Pakistan stand out and Türkiye has entirely recouped all of the losses over the last week as well. So, some interesting price action there. 

For Sub-Saharan Africa names, we're still trading at about eight to 10 points below where we were trading even two weeks ago. So if the tariffs and secondary tariffs are not a major consideration, and if this global economy doesn't tank, those credits are a great opportunity. As a matter of fact, it's been good demand for paper throughout this whole crisis or episode, I should say. 

In the initial stage last week, when things really fell off rapidly, there was a lot of demand for IG paper. A lot of people were really busy closing their underweight positions in investment grade, very Treasury-sensitive paper, long end of the curve even. And then more recently, so over the last couple of days as things were trading at a steep discount, there was a lot of demand for the more discounted securities. Yesterday was probably the weakest point of this recent episode for the high yield part of the market, the triple C and single B was actually pretty hard to even look to find paper in size. So, good demand and certainly no sign of this market being in complete dislocation mode. I mean it's been orderly… I think that's the word that I would go back to. 

Now I want to maybe switch to a few words on local currency if I may, just a couple of minutes. In the local currency space, it's really traded very strongly and firm this year. The dollar has been soft really since Trump's inauguration. Nor was there any pressure in the EM local market. We've since some pressure, we haven't seen any of it really in the rate space. Rates are trading in the GBI-EM GD at an average yield of 15bps lower since the start of the year. So we haven't seen pressure in the rates market. Even when FX was weak, which was the case and started weakening over the last two or three days, rates held up pretty well for the most part I would say, except in LatAm. The higher beta markets really stood out and lived up to their reputation, Colombia, Brazil, even Mexico. But even the rest of Chile and Peru started really selling off yesterday as the market was undergoing the first sign of stress. That, however, has now entirely reversed. 

As you could expect, we've seen last night after Trump's announcement, the Mexican peso, Colombian peso, Brazilian real, between 3-6%. So we're now in FX performance terms, the GBI-EM GD index is still up 2% year-to-date and about flat month-to-date. So again, no sign of stress. And the difference I suppose between this crisis and prior crisis is that it's not a funding crisis, right? It's again, an episode made in the USA. I think there’s now a trend towards reducing large US dollar exposures on the part of global asset allocators. People are dumping dollars, so dollar liquidity is good. 

And if we look at funding market stress indicators, there's been absolutely no sign of stress be it in developed market, credit markets, but even more so in EM. In EM, say cross currency, OIS, all of these indicators or bid offer spreads on swap contracts, etc. All of that has been really, really tight. And so it speaks to pretty resilient performance from emerging markets in this recent episode. I'll leave it at that and see if we have questions on that.

Stewart McAndie: Yes, absolutely, thanks, Alexis. There are a couple questions that have come through. One is specific if you don't mind, Ed, relating to frontier market equity. Obviously, Vietnam has been hit with quite a high tariff and we have the frontier equity business and exposure there. Could you make a comment on our thoughts there and how we see that one moving forward?

Edward Evans: In Vietnam's case, it is currently reliant on exports and foreign direct investment (FDI), so clearly tariff negotiations have, let's say outsized importance. I do note that I think it was one of, or if not the first, country to be mentioned in Scott Bessent's announcement last night of being on the table to be negotiated. So there's a hope that that's quite a quick outcome or quick solution, as visibility is most important after all. 

I think the other key point to mention in Vietnam's case is that it had been going through – after quite frankly quite a difficult domestic period, a corruption purge, instability in the real estate market, a lack of domestic confidence, let's say – it had actually been getting on the front foot domestically. Vietnam has been weaning itself off that outward-facing reliance and being much more literally on the cusp, on the verge, of pushing a lot of pro-reform, pro-infrastructure, pro-build out domestically. And that was where we primarily saw the investment opportunity in that strategy. And that hasn't changed, although the degree to which tariff negotiations come through, and the speed of that, may slow or may impede that. 

Now of course, the other key point to remember is Vietnam is, on let's say on structural grounds enviably well placed, literally enviably well placed geographically, but also in terms of its size, its demographics, its skillset of its population. It wasn't a surprise to see Vietnam being the primary winner during the first Trump presidency. And also with a general base case sentiment of the US primarily looking to contain China rather than perhaps a series of other powers and instead to actually build strategic allies around the world, then Vietnam would probably fall into that camp. So again, I think there's a balanced story to be made in terms of the opportunity in Vietnam. Again, from a valuation multiple point of view, it came into this period actually reasonably, lightly owned, pretty attractively priced given I mentioned it had come through some domestic wobbles. 

So right now today you're trading at extremely cheap valuation levels and I think from an active and nimbleness perspective, I think there'd be very strong opportunities on a more medium-term basis.

Stewart McAndie: Thanks, Ed. Another question's come through. Obviously inevitably as we entered the year it was all chatter about US exceptionalism. This question is about this Liberation Day – has it essentially enacted a complete shift away from that and a real distortion in terms of trade geopolitically, etc? Can you make some comment going forward whether this is going to permanently impact that?

Gustavo Medeiros: Well definitely. I think that not only the trade actions but also the geopolitical moves with J.D. Vance's aggressive speech against Europe at the Munich Security Conference and then the meeting between Ukraine’s President Zelenskyy with J.D. Vance and Donald Trump, in the White House where basically they were picking up the side of Russia more aggressively and then trying to undermine – even humiliate –Zelenskyy in the White House. That left an impression that the US is looking out for themselves and only themselves when it comes to trade relationships, etc. So that is the backdrop in which the EUR 1trn of fiscal stimulus got approved in Germany. The backdrop in which the EUR 150 bn repurposing of the pandemic-related measures to defence got announced by Ursula von der Leyen. She's looking into levering it to EUR 180 to 800bn.

So, if you add those two numbers up, the fiscal announcement coming from Germany and Europe, we're talking about historical numbers here, in line with German reunification fiscal stimulus. That is likely to provide support for the rest of the world for longer. What we're likely to see, and obviously the Chinese fiscal stimulus that has been announced on a piecemeal basis since September, and Chinese fiscal and monetary policy stimulus is likely to be accelerated and significantly from here as a result of trade. 

I think the fact that the US has been very indiscriminate when it comes to trade between partners and countries where geopolitically the US is not aligned, if you will, it's going to have a significant toll on the relationship of the US with partners. It is very likely that the rest of the world would open up more between themselves and would trade more between themselves as a result of that, with everybody trying to reduce their vulnerabilities or their exposure to the US. So as Alexis mentioned, this is very much a crisis made by the US and I think that's corroborated by asset prices, what Alexis and Stewart had mentioned in terms of outperformance of rest of the world assets vis-a-vis the US. 

I think we started the year very much with, our core thesis was that US exceptionalism was overblown, right? And that US assets had a lot of left-side tail risk and assets in the rest of the world have much more right-side tail risk. We saw that playing out very aggressively until the end of March. And then in April obviously we had the tariffs leading to a severe risk-off environment where it's very difficult to differentiate and people are trying to reduce risk pretty much across the board. But it's telling that US assets were the ones that were impacted the most. It shows that the positioning remained very much crowded in the US, and there is a lot of assets to be rebalancing away from the US and the rest of the world. 

So as Alexis mentioned, the dollar has been dumped pretty much across this environment and is also I think a reflection of the fact that asset prices were far more expensive in the US vis-a-vis the rest of the world. In the equity space it's pretty obvious, but also in the fixed income space. When you look at US high yield, we're talking about 140bps wider than year-to-date, which is significantly higher than what we're seeing in the EMBI and the CEMBI space. Thanks to again better, less vulnerabilities, right? 

It's also I think worthwhile highlighting here that EM has significant policy leeway to compensate for that. And I think most EM countries will opt or will use monetary policy as its primary tool to the extent that quite a lot of countries have interest rates at very elevated levels. I think I had mentioned Brazil, where policy rate is getting close to 15%. This is a country that has little direct exposure to the US trade problems, but it obviously has very high exposure to the global liquidity and global risk-taking appetite. And it also has exposure, everybody does have exposure to the fact that if the US goes very, very aggressive and we have a recession in the US economy then I think that's going to spillover to everybody else. 

But in that scenario, we think that Brazil can slash interest rates perhaps by, you know, 500 basis points, why not? We're thinking about large numbers here rather than small numbers, and I think that's the same pretty much across all EM local currency spaces,  which would have a positive support for the equity markets as well as lower interest rates tending to be supportive. 

So yes, very much we're looking at the end of US exceptionalism and this trade policy have been accelerating that. And we're looking at US partners to be much more distrustful of the US as a solid trading partner on an ongoing basis. There is more potentially a little bit of discrimination between this administration and future administrations to be had. But I think that again some of the severe damage has been done and the most important element is really this overall excessive positioning at the beginning of the year, concentration US assets and the level of valuations that have been very much out of whack.

Stewart McAndie: Thank you. There's a question specific on the fixed income side, Alexis. As mentioned earlier – that Asia seemed to be more impacted by tariffs and tariff rates – can you give some context in terms of the exposure within the indices to Asia. And also maybe mention there's another question on frontier debt. How's local frontier performed during this period?

Alexis de Mones: A good question. Asia indeed has been the most targeted, at least by the tariffs that were announced last week. The sovereign external debt market, so the MBGD index itself is not very Asia heavy. Asia has a lot of foreign exchange, they don't need to borrow in dollars very much. A few countries in Asia never borrow in dollars at all, so it's only 16% of MBGD. So I think it's been definitely a source of resilience in that regard. There is, as part of the MBGD index, I would say well China is 5% but China doesn't really need dollars. So China has traded very tight. And Indonesia was one of the countries that I would say was slightly exposed as being one of the top 10 countries in terms of having a current account or trade surplus with the US. But MBGD very low Asia exposure. 

Conversely, I would say in the corporate debt index that CEMBI has a lot of Asia, about 40%, but a lot of it is in very high quality, say sovereign jurisdiction, and issues has been dominated by investment grade issuers and it's tightly held by locals as well. So actually Asia CEMBI performance year-to-date is up about 1%. So, you see that there's been no real impact of the tariffs on Asia EM corporate credit. Local currency stands out in that regard. I think that's definitely where you could have expected pretty, pretty big moves there. China is 10% and Asia is over 40, 45% of the GBI-EM GD index. So has the GBI been impacted? Well there are a few currencies, notably RMB is controlled, right, so it hasn't really moved and that's definitely helping. Some currencies have weakened a little bit over the last few months. India started to be a little bit weaker, Indonesia as well. So they've definitely felt pressure. But what's interesting is that as long as China can close its currency, I think that the moves in those FX would be limited. But that's something to watch out for. Now they have good, I'd say in Asia in general, good fiscal runway. So whatever external shock there is, they have room to stimulate domestic demand through fiscal means. Principally, not many have a lot of room for monetary policy stimulus, although India started cutting rates and has more room to cut Indonesia as well. So amongst the high yielders, you still have a bit of room for monetary policy easing as well. 

So that's what we see in Asia. In our frontier strategy we have no Asia, so I suppose that answers the question about the exposure of that strategy. You do have a few frontier potential investments in Asia such as Sri Lanka, which has been slapped with one of the highest tariffs actually on the list. We don't own it and certainly it's been impacted negatively. Frontier in general has been a little bit volatile, particularly the hard currency, the dollar paper, which is more cyclical. Local paper has really been very solid. Again, some of the yields on the Nigerian TBLs widened a little bit, but now everything is rebounding strongly, external and frontier, particularly Ghana, 10 to 15%, and recorded about six, seven points today, this morning, so strong rebound. I'll leave it at that.

Stewart McAndie: Great, thank you very much Alexis, and thank you Gus and Edward as well for your time today. And to all attending, again, thank you for joining Ashmore's webinar. If you have any other questions, please reach out to your Ashmore representative. That concludes today's webinar. Thank you.