Emerging markets (EM) have become caught in a tug of war. On the one hand, improving vaccination rates, rising commodity prices and improving economic growth have driven a recovery in developing market assets. For the EM specialist asset manager Ashmore, that has translated into a strengthening recovery in investment performance and flows into its funds.
Assets under management rose by 5 per cent to $94.4 billion during the fourth quarter — ahead of analyst consensus and at the highest point since 2019. Taking advantage of depressed valuations fed through to those investment gains. Inflows were also positive on a net basis for the second consecutive quarter.
But if the market more broadly has shifted towards a more risk-off approach, investors have not become any more laid-back in their attitude towards Ashmore itself. In fact, at just over 14 times forward earnings, the shares are valued at broadly the same level as the year of the “taper tantrum” in 2013, when a messaging misstep around a potential tightening of monetary stimulus sparked an exodus of cash from emerging markets. The fourth quarter beat market expectations but failed to register an improvement in the shares, which were flat at 407p.
The threat of the Federal Reserve rolling back its doveish approach continues to loom. An unexpected acceleration in the rate of stateside consumer price inflation in June has further challenged the chairman Jerome Powell’s assertion that any rise in inflation will be “transitory”. It followed news last month that most Fed policymakers expected interest rates to rise in 2023 rather than 2024.
Inflation is anathema for bonds full stop because it reduces the present value of the future interest payments they will make. A rise in rates would help control consumer price rises. But if the Fed pares back its huge asset purchasing programme, the sell-off in US treasuries — therefore increase in yields — that would greet the move, would also undermine the reward on offer from investing in riskier emerging market debt. Ashmore’s bias towards fixed-income strategies, which accounted for 92 per cent of assets at the end of June, means it could be more vulnerable.
But if the spectre of US inflation has cast a shadow over Ashmore’s market valuation, the FTSE 250 group’s chief executive Mark Coombs credits a hawkish stance from EM central banks in calming attitudes towards fixed-income assets issued by governments and companies in those markets.
Analysts forecast a decline in revenue of 13 per cent this year and a 5 per cent dip in earnings before interest, tax, depreciation and amortisation (ebitda), which strips out the impact of currency movements and gains on seed capital investments. But ebitda is expected to return to growth next year and supersede 2020 levels by 2023.
Ashmore has a couple of defences that may soften the blow of volatility in emerging markets. First, more flighty retail punters account for only about 10 per cent of assets under management versus institutions, who typically take a more long-term approach. Second, a flexible cost base softens some of the blow when assets under management do fall. The asset manager makes a point of maintaining low fixed costs, including paying fund managers a low fixed salary that is topped up by commission from any outperformance. During the first half of the year the adjusted ebitda margin was maintained at 68 per cent despite the fall in net management fees.
Sentiment towards emerging markets has warmed. But Ashmore’s cautious valuation adequately prices a potential whipsawing in flows.
Advice Hold
Why The shares are well-priced for the uncertain outlook for emerging market flows
Tullow Oil
The Africa-focused oil producer has been a lesson in equity value destruction. While last year’s oil price crash blighted producers across the board, Tullow was left in an exceptionally precarious position following a series of production disappointments.
So bullish guidance for output this year made a change — enought to send the shares to the top of the day’s FTSE 350 risers. Full-year production is expected to come in at 55,000-61,000 barrels of oil per day (bopd). That might be down from the 60,000-66,000 flagged in March, but after stripping out the impact of the sales of assets in Equatorial Guinea and Gabon it leaves the mid-point of the guidance higher.
“There’s also a possibility that a couple of investors are thinking the guidance is a little conservative,” said Colin Grant of Davy, the stockbroker. Production of 61,200 bopd during the first six months of the year, which included a better-than-expected showing from its core Jubilee field in Ghana, might leave the mid-cap oil group with less work to do for the rest of the year.
In May it secured a lifeline refinancing of its hefty debt pile, launching a $1.8 billion bond issue and securing $600 million in support for a revolving credit facility. It now has no debt maturing until 2025.
Progress in chipping away at one of the group’s most worrying aspects was less forthcoming, despite the higher realised oil price. Net debt is expected to stand at $2.3 billion at the end of June, down only slightly on the $2.4 billion this time last year and higher than the $2.15 billion forecast by Jefferies. That suggests that after banking proceeds from asset sales, first-half underlying free cashflow “was essentially zero”, the brokerage argues.
Investors should expect slow progress at the full year. Underlying operating cashflow is expected to be $600 million for the year but most will be swallowed up by capital expenditure and cash financing costs due to amount to $540 million.
Not much hope is manifested in the shares, which gives the group an enterprise value-forecast ebitda multiple of little more than three. That seems a good reflection of the hard work Tullow has still to do.
Advice Hold
Why Slow progress on improving cashflow and reducing debt seems likely
