In the weeks leading up to the inauguration of US president Donald Trump, many predicted a thawing of relations with Russia. But, so far, 2018 has been a tempestuous year for international diplomacy, particularly between these old foes.
Earlier this month, the US imposed sanctions on Russia, which hit the Russian stock market. These targeted sanctions included the freezing of assets under US jurisdiction of seven Russian oligarchs and their companies, while US nationals were forbidden from investing in them. One such oligarch is Oleg Deripaska and his aluminium behemoth Rusal.
Nothing to see here
Alexander Branis, Citywire AAA-rated manager of the Russian Prosperity A fund, considers this a fairly new situation. That is because the recent bout of volatility is driven by political rather than economic factors.
‘But you could say nothing’s changed on the ground, except in relation to one company: Rusal,’ he pointed out. ‘Otherwise, the Russian economy continues to recover, interest rates continue to go down and Russian companies continue to improve.’
Branis highlighted Sberbank, which last week announced it was paying $4 billion (£3.2 billion) in total dividends, twice as much as in the previous year. And this is despite a 30% share price dip in the previous week and investor fears over loans extended to Rusal and electricity company T Plus.
Political instability is harder to predict than economic factors, according to Branis. ‘Certain types of sanctions would be more damaging to Russian equity markets,’ he said. ‘But I’d expect the dust to settle as it always has.’
The fund manager said Russian equities now look relatively cheap. This is particularly so given economic improvements in the country in the past couple of years.
Raheel Altaf, co-manager of the Artemis Global Emerging Markets fund, also believes the Russian economy is robust enough to withstand sanctions-related volatility. He said his approach in volatile markets is much the same as for calmer ones.
‘We focus our attention on companies where fundamentals are attractive and valuations are supportive,’ he said. ‘At times of heightened risk, companies with strong fundamentals often offer better entry points to investors.’
Altaf said the Russian central bank has built up foreign exchange reserves and corporates have reduced debt. And he pointed out the economy has emerged from recession and inflation is starting from very low levels, ‘although it will probably accelerate if the rouble remains weak’. He also thinks the weakened fiscal position still ‘remains relatively robust, and the current account is still in surplus’.
His fund currently holds 8.5% in Russia, against the benchmark’s 3.2%. Altaf added this overweight position is largely derived from a positive view on oil and gas stocks. ‘Russian companies such as Lukoil and Tatneft have offered compelling value and seen positive corporate newsflow, all backed by a firming oil price,’ he said. ‘And, in the past six months, we’ve added to other areas of the market, such as Globaltrans, given improving economic data and a benign inflationary environment.’
Nicholas Mason, Citywire + rated manager of Invesco Emerging Europe Equity, said sanctions and Russian equities declines were a setback. But he sees buying opportunities in ‘cash-generative businesses’ offering ‘compelling valuations’.
‘Even before the recent sell-off, Russian equities were cheap,’ he said. ‘At the start of the year they traded at big discounts to their peers elsewhere in the emerging world.’
Mason thinks they look even more attractive today, despite the prospect of further sanctions.
‘We’re in dialogue with Invesco’s US head of government affairs to try and understand the Trump’s administration’s approach on sanctions,’ said Mason. ‘We expect continued short-term Russian market volatility, but it provides opportunities to buy undervalued stocks.’