Market woes batter Russian funds’ performance

The country has been hit by the recent oil price weakness, which has severely dented the Russian equity market and pushed its bond yields higher. The price of Brent crude has fallen below $60 from a high in June of $115.

This has hit funds which focus on Russia, including onshore ones run by Barings, JPMorgan Asset Management and HSBC Global Asset Management.

Russia’s central bank took drastic action on Monday by raising the interest rate by 6.5 percentage points to 17 per cent but this only led to a minor strenghtening of the rouble against the dollar.

And things are not expected to get much better for the country, with statistics from its own central bank suggesting the economy will contract by 4.5 per cent in 2015 and 0.9 per cent in 2016, before returning to a positive figure of 5.6 per cent.

Barings’ Michael Levy, who runs the group’s Russian equity fund, said in an update he had “scaled back our exposure to Russia as the situation in the Crimea escalated”, adding he was “monitoring the latest developments closely with a view to taking action as required”.

The fund’s November factsheet shows it had 3.5 per cent in cash and equivalents.

Claire Peck, a member of JPMorgan Asset Management’s emerging market equities team, said Russia “has been and remains the most volatile” of the major emerging markets.

She said the team was focused on “higher quality, domestic-orientated companies and businesses which earn profits in dollars.

“Whilst unpleasant, the current environment is not unprecedented in our 20-year history of investing in Russia,” Ms Peck added.

Robin Geffen, who runs Neptune’s Russia & Greater Russia fund, acknowledged “a sharp recession ahead is now near-certain” and that “economically it will get worse before it gets better”.

“Western sanctions on Russia have weighed down on growth for most of the year,” he said.

“However, the much more significant issue is the speed and extent of the oil price decline since the middle of the year from $115 per barrel to less than $59 per barrel.”

Commentators have said while the situation in Russia might not be as bad as in 1998 when it experienced a full-scale currency crisis, the country was under significant pressure.

Alexander Moseley, an emerging market debt manager at Schroders, said Russia was experiencing a “full-blown currency crisis” and suggested it would not end until the source of stress ended.

“Our strategy has been to be underweight the rouble for most of this year, and we will continue with that strategy until one of three things happen: the central bank overwhelmingly moves to support the currency, oil stabilises, or sanctions are lifted,” he said.

“It is difficult to see the underlying source of stress ending. An end of the war in Ukraine and the lifting of sanctions would be unambiguously positive.

“But a deal over Ukraine is unlikely to happen any time soon. The war in Ukraine is a unique feature of this crisis. Stabilisation of oil prices would also be unambiguously positive. But this is difficult to predict and in any event there are better risk/reward ways of positioning for a rebound in oil.”

Anna Stupnytska, global economist at Fidelity, said Russia was heavily reliant on the direction of the oil price but pointed out sanctions as a result of the Ukraine conflict, weak institutions and corruption “all aggravate the situation”.

“Capital outflows are set to continue, and the economy is definitely going deeper into recession,” she said.

“The question is, how far can it fall?”

HSBC did not respond by the time of publication.