Jefferies has upgraded specialist emerging markets investment manager Ashmore Group (ASHM) to ‘Buy', as the analysts argued the environment for EM debt "looks favourable from here".

The asset manager's share price is down over 19% in the last three years, according to Morningstar Direct. In the third quarter of this year, assets under management continued to decline, pushed down by negative investment performance and net outflows of $2.9bn.

In a research note, analysts Laura Gris Trillo, Tom Mills, Julian Roberts and Fangfei Li wrote that the firm's current valuation offers an "attractive entry point" due to expectations its shares will be a "geared play on an EM recovery".

Ashmore outflows mount as AUM drops 8% in Q3 2023

"ASHM is down but not out. The cyclical nature of EM and, by extension, ASHM's business renders it vulnerable to shifts in investor risk appetite, but we believe the set up for EM debt (ASHM's 85% of AUM) looks favourable from here," they wrote. 

Having conducted an "extensive analysis" on the timing and drivers of flows into emerging market debt funds, the analysts said Ashmore was "well-positioned" to benefit from more constructive sentiment and favourable flow trends as terminal rates come into view. 

"We expect ASHM shares to initially move higher in response to a potential improvement in EM systemic flows consistent with past trends," the analysts added.

Ashmore claims EM turning point despite plummeting profits

They also argued the macroeconomic prospects for emerging markets have improved, with a decline in inflation expectations, a weakening of the US dollar, and certain EM economies, such as Brazil and Chile, initiating interest rate cuts.

Additionally, the analysts noted that International Monetary Fund forecasts indicate emerging markets are set to outperform developed markets GDP growth by the most "in a decade" over the 2023-2024 period. 

"If US interest rates have reached peak levels, we should see an increase in allocations to EM debt and EM equity funds over the coming months, as EM fund performance improves and investor confidence returns," they said.