Where next for Russia?

It’s been more than four weeks since our last post on the subject of growing uncertainty surrounding Russia and the Ukraine. Has anything become clear since?

In political terms, it seems that significant changes have been made. As was previously the case, it seems to us that this is not the place to ponder politics in great detail. However, what we can say is that there are still further changes to come. Until the situation in the Ukraine settles down, it’s hard to imagine a similar stabilisation within Russia’s financial markets.

The repercussions are likely to continue too: there are clearly implications here for neighbouring states, together with international relations. With accounts being frozen and threats being made from all sides, it seems unlikely that the situation will settle down any time soon.

Are we any further forward as a result? An observation here would be that markets rarely react well to such elements of uncertainty. This doesn’t mean that those investors with an ear to the ground will find it impossible to find value within such markets, but it undoubtedly means that we can expect to see increased levels of caution.

When it comes to our own focus on the approach taken by Nevsky Capital in such circumstances, there’s a desire here to learn from the tactics of professional investors. Many private investors are also likely to be following their lead, seeking to get an insight into what the future is likely to hold.

For Russia, it’s clear that many more changes can be expected. Judging the nature of those changes remains difficult and it may take bravery to step in to some investment opportunities right now. What we can say with real certainty, however, is that financial and political analysts will continue to monitor ongoing events. The next few months and years will undoubtedly provide some interesting news stories.

Volatile Russian markets

The recent headlines being made in the Ukraine are clearly of interest to those who wish to invest in Eastern Europe. It should be noted that this blog is certainly not the place for a discussion on the political merits of decisions that are being taken in that part of the world.

However, the financial ramifications are certainly of importance and it’s right that they should be given due consideration. After all, an understanding of what’s going on could lead to a greater insight on the investment opportunities that may be available.

As has been written elsewhere, one of the knock-on effects of the crisis has been the falling value of many shares on the Moscow stock exchange. Some analysts have attributed such falls to the sanctions that have been announced by a number of Western governments. Again, without looking too closely at the nature of such sanctions, it does seem reasonable to ask whether there is a need to consider the impact here on investors.

The future of the Ukraine

For those who are looking to invest directly in Ukrainian companies, there’s a high degree of uncertainty right now. Few people could claim to have an understanding of how the situation will resolve and what it will mean for businesses that are local to that area. What we do know, however, is that markets and investors rarely like a high degree of uncertainty.

Until the crisis reaches a point of resolution, it seems reasonable to expect that share prices will continue to fluctuate.

The impact on Russia

Much of the focus of the news headlines has understandable been on the people of the region and how their lives might be expected to change. Much analysis has been carried out on the Crimean region, in particular.

But what about the impact on Russia? Tumbling stock markets rarely lead to positive headlines and it might be expected that investors will flee, looking for alternative safe havens.

This undoubtedly provides an interesting situation for fund managers and others with expertise that is region-specific. For the most part, their expertise will mean that they will have been aware of what was brewing, well in advance of this coming to the attention of the wider public here in the UK. What that should mean is that they were already making investment decisions that took into account the amount of risk that was involved.

Conclusions

The biggest losers here, in purely financial terms, are likely to be amateur investors. While professionals may have had advance warning of the looming crisis, it’s to be expected that many amateur investors will have witnessed these events from afar, with a combination of surprise, outright shock and obvious concerns.

This is very much a live situation too. Until events settle down, it’s very difficult to know whether there will be a real long-term impact. For those who are reliant on professional Fund Managers, the hope is that those experts have done their research.

For those who are investing directly in the region, it’s time to look more closely at what’s going on, in order to allow the correct actions to be taken.

 

Eastern European Fund – November 2012

Looking back on October 2012, there’s a clear impression of a relatively quiet month on the markets. Overall, the fund saw growth of 0.74%, which compared favourably with the peer group average (a fall of 0.49%).

The best performing market was Turkey, where a rise of 10.4% during the course of the month was of benefit to the fund.

At the other end of the spectrum, the performance of the Russian market was disappointing, with a decrease of some 3.4% (in US$ terms). Fortunately, the fund was able to take advantage of strong stock selection within the oil sector.

The announcement that Rosneft (the state-backed company) was buying TNK from BP and its Russian owners, brought welcome news.

Overall, the fund holds 56.7% within Russia, 13.9% within Turkey and 9.9% in Poland. Further holdings are present in Hungary, the Czech Republic and Kazakhstan. A further 9% of the overall allocation is in the form of cash.

Looking at key metrics for the fund, it can be seen that an annualised return of 19% has been produced since the launch of the fund in 2000. The fund has a total size of almost $585 million and almost 36% of holdings are within the Energy sector.