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.
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.
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