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What the Russia-Ukraine crisis means for Emerging Markets investors

The Russian economy has been performing strongly, but the outlook is now uncertain as global sanctions bite. Here is the EM view from Pendal’s JAMES SYME

THE investing environment for Russian assets is clearly extremely uncertain right now.

Geo-political risk is intense — possibly the highest of any Emerging Market in the modern history of the asset class.

However, recently the Russian economy has been benefiting significantly from current demand levels and prices for major commodities. The equity market is incredibly cheap on all measures.

The Russian economy has been performing strongly on the back of commodity exports and a domestic recovery from Covid.

Economic growth in 2021 accelerated to a 14-year high of 4.7%, beating consensus forecasts.

Exports, investment by oil and gas companies and government spending have been all major contributors. Growth was stronger into the end of the year, and the outlook for growth in 2022 is promising.

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Pendal Global Emerging Markets Opportunities Fund

Our positioning in Russia was to move from heavily underweight to slightly overweight in January, following the declines in the equity market and the currency despite robust fundamental conditions.

From the October 2021 peak to the end of January, MSCI Russia index fell 24.6% in USD terms, even as the oil price rose through the USD 90/barrel level.

We recognise the intense political risk at the current time and the chance that sanctions mean we will not be given the time to see valuations move to reflect economic fundamentals.

However, we believe that, as index-relative investors, it is risky to not have (careful, scaled, diversified) exposure to Russia, given valuations and fundamentals.

An improvement in the political environment could lead to a very significant move in Russian assets, as we have seen in previous recoveries.

In calendar year 2009, the USD total return for MSCI Russia was more than 100%. From late 2014 to late 2016 it was 63.7%. From October 2020 to October 2021 it was 83.2%.

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We would highlight another facet of emerging market equity investing – there are no ‘safe’ investments.

In the past 12 months previous investor favourites Alibaba, Meituan and Sea Group (all Emerging Asian internet companies) are down more than 50 per cent in USD terms.

In the same period, the highly unpopular Brazilian energy company Petrobras (which has been one of the largest holdings in the portfolio) has returned 114% in USD terms.

We continue to adhere to our successful process, which is to combine economic, political and market risks and opportunities into a top-down view to identify preferred countries, and to apply a rigorous risk-focused portfolio construction process to allocate to those markets.

About James Syme and Pendal Global Emerging Markets Opportunities Fund

James Syme is a senior portfolio manager of Pendal’s Global Emerging Markets Opportunities Fund with Paul Wimborne.

The fund aims to add value through a combination of country allocation and individual stock selection.

The country allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.

The stock selection process focuses on buying quality growth stocks at attractive valuations.

Find out more about Pendal Global Emerging Markets Opportunities Fund here
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.

Contact a Pendal key account manager here

This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current as at February 23, 2022.

PFSL is the responsible entity and issuer of units in the Pendal Global Emerging Markets Opportunities Fund (Fund) ARSN: 159 605 811. A product disclosure statement (PDS) is available for the Fund and can be obtained by calling 1300 346 821 or visiting www.pendalgroup.com. The Target Market Determination (TMD) for the Fund is available at www.pendalgroup.com/ddo. You should obtain and consider the PDS and the TMD before deciding whether to acquire, continue to hold or dispose of units in the Fund.

An investment in the Fund or any of the funds referred to in this web page is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested.

This information is for general purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient’s personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation.

The information may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information.

Performance figures are calculated in accordance with the Financial Services Council (FSC) standards. Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs. Performance data (pre-fee) is calculated by adding back management costs to the post-fee performance. Past performance is not a reliable indicator of future performance.

Any projections are predictive only and should not be relied upon when making an investment decision or recommendation. Whilst we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections.

For more information, please call Customer Relations on 1300 346 821 8am to 6pm (Sydney time) or visit our website www.pendalgroup.com

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