Russia’s recession-hit economy, linked to the plunge in oil prices and Western economic sanctions, has put downward pressure on the market.
The economy has also become more closely linked to China’s than it has been in the past, and China’s well-publicised slowdown is likely to continue. Ksenia Yudaeva, Bank of Russia’s first deputy governor, recently warned that a 1% slowdown in China’s GDP translates to a half percent point shaved off of Russia’s GDP, according to a Bloomberg report.
Nearly all Russia country funds available for sale in Asia have underperformed their benchmark over a three-year period. Two of them, the Parvest Equity Russia and Parvest Equity Russia Opportunities, did better (with a roughly -20% return) than the MSCI Russia 10-40 benchmark (-26%).
However, Egor Kiselev, manager of the two Parvest funds who is based in St Petersburg, told FSA he sees some supportive factors over the mid-term.
Given a two-year horizon, Kiselev predicts a flat or possibly appreciating rouble is likely as the price of oil stablises after what some analysts consider a bottom of around $28 earlier this year.
“When oil is up, the rouble starts appreciating. If the oil price falls to $20 and stays for a couple years, it would be a great challenge for the Russian economy and market. Those are the dynamics of the Russian market in hard currency terms.”
He also mentioned Russian company dividends, which are in the double digits for some companies. He believes they are sustainable over the mid-term. A third factor is interest rate cuts. Kiselev believes it is likely the Russian Central Bank will cut interest rates over the next two years by 250bp.
Kiselev said he didn’t know why other Russia-focused funds have underperformed their benchmark over a three-year period, but he believes a local fund manager presence is necessary.
“In the Russian market, like many emerging markets, the portfolio manager needs to be on the ground,” he said. “In Russia, stock picking really pays off. You can outperform the market and create larger alpha than in the normal developed markets where thousands of investment managers are looking for opportunities.”
He added that sanctions are not having much of an impact when compared to the impact of oil prices.
Gazprom and Sberbank, for example, the top two holdings in the Russia Opportunities fund representing about 17% of the portfolio, are subject to Western sanctions imposed due to the conflict in Ukraine.
“Due to sanctions, Russian companies have had to decrease their external debt. That has resulted in a situation where the amount of money Russian companies and institutions have to pay externally started to decline substantially and it has eased pressure on the rouble. That’s been supportive for the market.”
Over the next two-three years he remains positive on the Russian market. However, “In the near term, depending on oil price stabilisation, it could be a volatile situation in the Russian market.”
The two Parvest funds versus the benchmark MSCI Russia 10-40 over the last three years: