Russia: the facts have changed
Ross Teverson, Head of Strategy, Global Emerging Markets Unconstrained, reflects on the tragic events in Ukraine and the implications that sanctions and counter-sanctions have for emerging market investors.
For anyone whose investment remit includes the ability to hold Russian assets, the last week has changed everything. Like most observers around the world, including those that have focused on Russia for many years, I did not believe that Russia would launch a full-scale invasion of Ukraine. For one, there was no prospect of Ukraine joining NATO in the next decade and it might never have been in a position to join. The war does not have popular support in Russia, where many people have close personal ties to Ukraine, and a war risks precipitating an economic crisis in Russia. When news of the invasion broke, our team took the view that the West should, and would, impose unprecedented sanctions on Russia, and we immediately reduced our strategy’s exposure to Russian companies that seemed most exposed.
It is difficult to see any immediate resolution to this devastating conflict. While we are hopeful that progress towards a cessation of fighting will be made in the talks that are currently taking place, the human cost of this war has already been immense and irreparable damage has also been inflicted to Russia’s position in the world. Investors often face a balancing act between two old adages: first, that on a long-term view one should invest when things look bleakest, and second, the old John Maynard Keynes quote of “When the facts change, I change my mind”. It is our view that, regarding Russia, the facts have now changed.
The investment case for the majority of Russian companies, including those that are both very well-run and (until last week) highly profitable, has been broken by a combination of Putin’s grievous miscalculation in starting his war and the necessary heavy sanctions imposed by the West. In the short term at least, Russia seems uninvestable both on fundamental and practical grounds, both due to its developing economic crisis and the countermeasures imposed by Moscow, which currently prevent foreign investors from selling any locally-listed Russian stocks they hold.
The current crisis will have more severe repercussions than the 2008 Georgia war or the 2014 Crimean conflict. While there are some similarities with these episodes, from which the Russian market and economy ultimately recovered, current sanctions are much more impactful, likewise the economic countermeasures. If a negotiated solution is reached, then perhaps investors will start to consider the longer-term prospects of Russian companies, but as long as it remains ‘Putin’s Russia’ investors will continue to be extremely worried about the direction in which the country is heading.
Taking emerging market equities as a broader global asset class, for some time it has been our view that they’ve looked attractively valued both compared to developed market equities and their own history. Another thing that works in favour of emerging markets is that nowadays many emerging market companies have relatively conservative balance sheets. The combination of these things should, in our opinion, make emerging market equities more resilient in a rising interest rate environment – and indeed this appeared to be holding true before the recent volatility. One of the things that emerging market equity investors need to grapple with now are some of the second-order consequences of what’s happening in Ukraine, and that’s something my team and I are currently focusing on.
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