Shares digital

Ashmore Group (ASHM) – 253p, stop loss 202p

SHARES SUMMARY

A blue-chip financial stock making money from emerging market debt. Cheap due to negative sector perceptions, this presents a good buying opportunity.

Business:

Leading emerging markets investment manager

Vital stats:

Market value: £1.75 billion

Historic PE 2007: 19

Prospective PE 2008: 13.3

Prospective PE 2009: 11.2

Sector PE: 12.2

1-month relative strength: -5.4%

1-year relative strength: -1.7%

Yield 2008: 4.9%

NMS: 5,000

Spread: 0.5%

Credit crunch, what credit crunch? While the US and Europe struggle against shrinking liquidity, developing countries are flush with cash.

Countries such as Brazil, Russia, India and China, along with neighbouring countries, are net creditors, and so almost invulnerable to external economic shocks. Secondly, their debt is largely held by pension funds and other long-only unlevered institutional investors not prone to panic.

Ashmore is making loads of money managing this institutional investment in emerging market debt. The largest slice is debt denominated in dollars and other hard currencies, which rose 9% to $23.1 billion in H2 2007. Far behind but growing fast is debt denominated in local currency, which jumped 28% to $6.4 billion.

Ashmore has three other investment themes with more in the pipeline. Special situations investments soared 50% to $5 .1 billion, equity investments fell slightly to just under $2 billion while corporate bond funds, just launched, attracted $600 million investment with the yields forced even higher by the credit crunch.

Altogether, assets under management rose 16% to

$36.5 billion. Net management fees shot up 54% to £86 million because the funds performed so well that big performance-related payments of £32 million were achieved.

Admittedly there is no guarantee that Ashmore’s various funds will continue to achieve such excellent performance, especially if the West falls into a severe recession.

However, the group says current market volatility provides attractive investment opportunities, which will sustain rapid growth.

Crucially, developing country debt is arguably safer than developed country debt. Inflation is generally under control and governments have adopted sensible economic policies.

Best of all, emerging markets represent 85% of the world’s population but their debt is only a fraction of the world total. Emerging debt is around

$5,500 billion, up 25% in 2006 and a similar amount last year.

Ashmore reckons developing country assets such as shares and bonds could account for half of global market values in 15 years’ time. Therefore pension funds should put a third of their assets into emerging markets now to maximise their returns and provide diversification.

The other bullish factor is the growing credibility of local currencies. A few years ago the Brazilian real was a no-no, with inflation running at over 100%. Today inflation is down to 5% and the real is rising against the dollar and pound. The Chinese renmimbi is reckoned to be 35% undervalued against the dollar despite rising almost a fifth over the past four years.

So investment in local currency debt is growing fast as pension funds are benefiting from a triple whammy of high yield, lower risk and currency gains. Ashmore expects emerging currencies to gain a further 30% against developed world currencies in the next few years as their governments further relax the dollar pegs.

All the analysts following Ashmore are bullish. Full-year profits are expected to zoom from £131 million to £188 million this year and hit some £220 million in 2009. This will drop the PE from 19 to just over 11.

Too cheap for a fast-growth stock with huge opportunities.

by: Timon Day