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Who's still bullish on Russia?

Who's still bullish on Russia?

Russian stocks took a big hit last month with the MSCI Russia index diving in April as US sanctions take hold amid a backdrop of geopolitical tensions.

Russia’s 50 richest businessmen have also borne the brunt of this, losing nearly a combined $12 billion (£8.4 billion) in the immediate aftermath, according to Forbes.

However, with many emerging market fund managers starting the year overweight Russia, are investors still bullish on the country’s prospects?

‘Russia was cheap prior to all the sanctions and is even more so now, but the question really is: do the sanctions hurt the economy and damage the investment case?,’ said Citywire + rated Arjun Divecha, who co-manages the GMO Emerging Markets fund, which is overweight Russia.

‘Our view is that they don’t significantly damage the thesis, simply because the sanctions that have been implemented so far are extremely targeted at two dozen oligarchs and a few companies associated with them.

‘If the intention was to do damage to Russia Inc as it were, then the sanctions would look very different.’

Divecha cautions that this bullish view is based on the current round of sanctions and could change if wider or more punitive trade restrictions are imposed on the country.

‘The one thing that was very positive is that the current US regime has been careful to not make its recent engagement in Syria about Russia. This indicates that the administration doesn’t intend to escalate tensions more than necessary,’ he added.

Daniel Lane, an analyst at Fidelity International, said he understands why investors might be ‘feeling dazed’ by recent events and the threat of new sanctions, having gotten used to seeing a recovery in the Russian market since the global oil price collapse in 2015. 

‘Until the recent furore, the Moscow market was fast becoming a favourite among emerging market investors, surpassing India, thanks to its exposure to recovering commodity and oil prices,’ he said.

‘So it’s worth taking the latest episode as a necessary reminder of the volatility inherent in emerging market investing. Perhaps the fact that all markets have been somewhat unsettled so far this year has masked the ups and downs in emerging markets by comparison, but really the recent swings surrounding Russia come with the territory.’

The sell-off has now seen the market fall by -10.37% over the last three months, erasing the gains made in the early part of the year. Year-to-date, it remains in positive territory, albeit up just 0.85%.

But given the strength of the market’s recent recovery, Adam Laird, head of ETF strategy in Northern Europe at Lyxor, argues that the sanctions and sabre-rattling may have just caused investors to take profits. He added that many investors will buy back if relative calm breaks out, ‘hoping for a similar recovery’.

Valuation trap?

Not everyone is so bullish on Russian prospects, however. Despite cheap valuations many fund managers have been paring down their exposure.

Templeton Emerging Markets investment trust (Temit) announced this week that it is putting its Russian holdings under review.

The £1.9 billion trust had a 9.25% weighting to the country in February 2018, but has taken this down to 7.5% already.

Its new manager, Chetan Sehgal, said the move was designed to protect investors from the uncertainty of further sanctions.

‘The sanctions imposed on Russia this time have been more impactful than previous measures and there has been a real impact in financial markets,’ he said.

‘In our view, the financial markets need more clarity on the process by which sanctions will be imposed because it shouldn’t be that the biggest victims of the sanctions are American and Western investors.’

However, he added: ‘You want to ensure that those investors who are taking exposure to Russia have a clear visibility when it comes to what sanctions are imposed. It would be good to get that clarity because the uncertainty is driving valuations down in those markets.

‘We did curtail a little bit in the week of the sanctions and at this stage we are looking at the risk/reward situations and making a call as to whether we want to remain invested. It’s important to note that we did not have any exposure to Rusal and EN+, the companies that were sanctioned.’

Temit’s Russian market exposure remains more than double the MSCI Emerging Markets index weighting of 3.24%.

Sehgal added: ‘We also believe companies in Russia are still undervalued in terms of cash flows and earnings which they generate.’ 

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