Emerging market fund managers face worsening outflows

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Ashmore and other emerging market fund managers face further profit declines and worsening outflows as investors retreat amid concerns over rising interest rates, war in Ukraine and exposure to China.

This year will be tougher for most investment managers across Europe as markets become more uncertain, analysts at Bank of America say. The US bank cut its earnings per share forecast for Ashmore by 6-9% for the first quarter of 2022, and expects assets under management to fall another 11% – among the biggest drops expected for managers Britons interviewed by Boa.

Other leading investors with large investments in emerging markets, such as Abrdn, Schroders and Man Group, are also exposed to these pressures. However, these managers are more diversified companies than Ashmore, and less focused on emerging market debt.

“Emerging market debt saw outflows, not just for Ashmore but across the sector this quarter, which should come as no big surprise given rising US interest rates, higher rate expectations high, a strong US dollar and the Russian-Ukrainian conflict,” said Hubert Lam. , an analyst at BofA.

“For Ashmore, it’s a mix of the sector falling out of favor due to the conflict and higher interest expectations, but also due to the mixed performance of their strategies,” Lam said.

Ashmore, an emerging markets specialist with $87.3 billion under management, had placed large bets on Russian assets in the weeks before President Vladimir Putin invaded Ukraine in late February. According to Bloomberg, he also holds about $500 million in debt to struggling Chinese property developer Evergrande.

Foreign investors withdrew $11.2 billion from Chinese bonds and $6.3 billion from Chinese stocks in March, according to the Institute of International Finance, blaming Chinese markets for nearly all of the $9.8 billion. dollars of net outflows from emerging markets during the month – the first net outflow figure for a year. Other emerging markets saw equity outflows of $400 million and debt inflows of $8.2 billion.

Ashmore, listed on the FTSE 250, reported a $3.2 billion drop in assets under management in the second half of last year, and its share price fell by more than two-fifths in a one-year period. year until April 7. significantly below the benchmark in 2021.

Ashmore declined to comment.

“The business model faces these kinds of economic cycles in emerging markets, and we’ve been through a number of them,” Tom Shippey, the group’s chief financial officer, told the Financial Times in February.

“We are an investor in China Evergrande, we continue to monitor this situation very closely. . . If the [investment committee] continues to have a position in one stock, whether it’s China Evergrande or another, then the committee is of the view that there is still value to be harvested,” he added at the time.

Evergrande is embarking on a restructuring process after defaulting last year, rocking China’s real estate sector and contributing to the country’s economic slowdown.

Abrdn has significant exposure to emerging markets in Asia, although its focus on more stable equity markets has mitigated the impact. BofA expects outflows to average 4% this quarter, continuing a multi-year trend within the company, while the FTSE 100-listed group’s share price has fallen by around a third in the past 12 month.

“Abrn and Ashmore both had exposure to Evergrande, and this would have had an impact on their performance. The funds’ performance was mixed, but some of the categories they underperformed were corporate debt and high yield, and those are the areas where they would have been exposed to the Chinese real estate sector,” Lam said.

Edmund Goh, head of China fixed income at Abrn, expressed concern over “the fallout from the giant real estate sector, where several developers have defaulted.” He added: “We believe Chinese US dollar bonds are still attractive to investors, especially after the recent market correction.

“It is true that the extent of the distress among private real estate developers has surprised many investors, but we believe that the current Chinese government no longer needs to continue to tighten its policies,” Goh said. “We believe some select names are still worth considering as they are trading at very deep discounts.”

While other players such as Schroders and Man Group are also exposed to emerging market risks, the impact is less apparent as it is a smaller proportion of their business.

Latin American commodity exporters maintained inflows

The IIF said Chinese markets had received steady inflows in recent years as foreign investors increased their exposure, despite China-specific shocks such as US trade tariffs and the early stages of the Covid-19 crisis. .

“However, this month our tracker shows a major release episode that is hitting China the hardest,” he said, adding that “this is unprecedented momentum that suggests a rotation of the market”.

Latin America gained the most in March, with net inflows of $10.8 billion in the month, split roughly evenly between equities and debt. Rising commodity prices and low valuations have drawn investors to commodity exporters like Brazil.

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