The persistent tensions in Ukraine which have dominated sentiment in the region hit the JPMorgan Russian Securities Investment Trust, as its shares dropped nearly 30 per cent in the six months to end-April.
While the situation has inevitably caused Russia’s risk rating to increase, manager Oleg Biryulyov said he remained positive on long-term opportunities in his favoured strong, cashflow-generating companies.
The trust saw its share price decline 27.6 per cent in the period, marginally more than its MSCI Russian 10/40 Equity index which fell by 26.4 per cent, according to the trust’s results.
The manager said the results were “disappointing” but reflected the political crisis in Ukraine, which has seen Crimea annexed by Russia and the introduction of US and EU-sponsored political sanctions against individuals.
Mr Biryulyov said there was a “clear increase in Russian country risk” because of the “escalating conflict”.
“The Ukrainian state is going through an extreme period of political instability and economic disruption and the situation has fanned the flames of a continuing uneasy relationship between Russia and the West,” he added.
“So far, it would appear [Russian president Vladimir] Putin is ready to shoulder the financial costs of minor economic sanctions in exchange for more significant gains in the geopolitical game.
“These developments are clearly detrimental for equity investors in Russian markets – the cost of capital is increasing and economic growth has decreased to zero.”
Although the situation will not clear up overnight, Mr Biryulyov believes the political situation in Russia could be seen as more predictable than six months ago, on the basis Mr Putin will continue to consolidate public support and strengthen the power of his government’s bureaucratic machine.
The manager said he believes there will be a gradual resolution of the Ukrainian situation, and based on that premise, valuations in Russia are attractive.
“Shares are trading close to levels last seen during the 2008-2009 period of the global financial crisis, while the current general economic environment is clearly much improved,” he said.
“The Russian dividend yield will be one of the highest in the world, as distributions have not tracked the general decline in the market.”
According to Mr Biryulyov, the Russian government is likely to use all available tools to stimulate economic growth in the second half of 2014 and throughout 2015, potentially including adjustments to the cost of state-related funding and guarantees, and state-led investments in infrastructure.
“Unfortunately privatisation will be postponed for some time due to current market valuations,” he said.
“This will delay diversification of the Russian equity market and restrict its representation and depth but we believe the reduction of state presence in the economy will remain a long-term strategy for the government.
“All in all, Russia again presents a mixed picture: a considerable investment opportunity, albeit without a clear period of time to realise and capitalise on that potential.”
