Emerging markets asset manager Ashmore put out a pretty tough set of full-year results on Tuesday.
Assets under management in the year to June 30 tanked 21% to $US58.9 billion (£38.38 billion) from $US75 billion (£48.8 billion). This decline was well flagged up this year but it shows just how tough the emerging markets play is right now.
The big decline was due to a double whammy of badly performing investments and clients pulling their cash out. $US6 billion (£3.9 billion) of the loss was asset performance while $US9.5 billion (£6.1 billion) was outflows. The strengthening dollar seriously hit Ashmore’s investment in emerging market currencies.
CEO Mark Coombs says in a statement this morning: “The past year has been challenging, with continued volatility in global markets.”
This doesn’t bode well for Ashmore considering Chinese equities continued to go absolutely nuts in the weeks after the company’s year-end date, sparking volatility pretty much everywhere.
Despite the tough year, Ashmore still thinks investing in places like China makes more sense than the US. In its market outlook, the company makes this interesting point (emphasis ours):
It is more than two years since the Federal Reserve surprised markets by announcing that it intended to taper its quantitative easing programme, which inevitably led investors to start considering the timing and trajectory of higher US interest rates. The consensus macro trades have therefore been long the US dollar, to play an economic recovery and higher rates, and overweight European bonds, in the face of relatively slow growth.
Importantly, the rally in prices of QE-supported assets in the developed world is now being challenged by the fundamental reality of persistent weak economic growth. The strength of the US dollar over the past few years is affecting US exports and investment, and certain European government bond yields fell close to zero earlier in 2015. Notably, during a protracted period of extremely accommodative monetary policy, developed economies have undertaken little if any reforms to address structural challenges such as high levels of indebtedness. This is in contrast to many Emerging Markets, for example China, which is pursuing a wide range of reforms including liberalising its capital markets and adopting a more flexible currency regime.
Basically, Ashmore thinks developed economies have blown huge, QE-filled asset price bubbles that are now on the verge of popping. Too much money printing, combined with demand for the dollar and European debt, has inflated the price of things.
In emerging markets on the other hand, assets are undervalued. Despite the fact that emerging markets are growing much faster than developed economies, investors are focusing on the fact that growth is cooling in China and the knock on effect that could have on other emerging economies. As a result, investors have cold feet.
Ashmore thinks all this will lead to a crash for developed markets and a surge of cash into emerging market assets. Here’s the company (emphasis again ours):
Across global markets there is likely to be convergence between asset prices and fundamentals over the next few years. In Developed Markets, this is likely to take the form of inflation and currency devaluations rather than real rate increases, austerity and reforms.
In contrast, after a period of continued volatility, Emerging Markets’ asset prices appear to be discounting a much worse fundamental outlook than is likely to arise, even with higher US interest rates. This suggests that the rational asset allocator will increasingly shift towards Emerging Markets, where there is greater value, more supportive fundamentals, and a need for investors to address underweight positions.
Of course, this is all pretty biased — Ashmore’s view of China “liberalising” its markets has been seen as the total opposite by others. Ashmore is an emerging markets asset manager and this type of scenario favours them.
But Ashmore isn’t the only one warning about the danger of an asset bubble in developed markets.
Moody’s Analytics flagged the danger of a QE-fuelled European housing bubble in July, Morgan Stanley has warned that low interest rates could be creating asset price inflation, and NYU professor Nouriel Roubini said at the end of last year that the US is mid-way through the “mother of all asset bubbles”, which could pop next year.
While it suits Ashmore to believe this stuff, it doesn’t mean it’s wrong.
Ashmore also announced this morning that net revenue improved 8% to £283.3 million ($US434.7 million) in 2015 and pre-tax profits increased 6% to £181.3 million ($US278.2 million), both beating forecasts. As a result shares are popping, up 6% this morning.
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