OpinionJul 3 2018

How funds investing in World Cup hosts Russia are faring

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How funds investing in World Cup hosts Russia are faring
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With Russia currently hosting the World Cup, we have taken a look at how its economy has been faring.

Russia was shown a controversial red card in the form of new punitive measures introduced by the US on 6 April, leading to a massive crash in Russian equity and currency markets.

However, it has managed to level the playing field somewhat having improved well, with the MSCI Russia index back on an upward trajectory.

Russian equities have hit a record high and Russia’s economy grew 1.3 per cent in the first quarter – up from 0.9 per cent in the fourth quarter of 2017. 

Despite a terrible month following US sanctions, the Russian economy has shown it can weather the storm.

Higher oil prices and a stable rouble has led Russian equities to hold up relatively well compared to emerging markets in general.

Disposable incomes and real wages jumped more than expected in April, which helped fuel a 2.4 per cent increase in retail sales.

Also, as wages are increasing, disposable incomes are expanding, and households shift from saving behaviour to consumption. The savings rate, as a proportion of incomes, fell in the first quarter to nearly the lowest since 2000, showing consumer confidence has grown.

Corporate liquidity also remains strong; economic stability, higher commodity prices, lower rates and a weaker rouble all point towards a broadly positive outlook for Russian equities.

A widening trade surplus and strong public finances is also positive and oil prices have surged to about $80 a barrel, which is good for sentiment.

FE Invest Approved List funds with exposure to Russian stocks

Much like the select nations that have qualified for the World Cup, a select number of funds have battled through the qualification rounds to make it onto the FE Invest Approved List; a recommended list of funds covering all asset classes and sectors, selected using FE’s comprehensive ratings, awards and research by its team of analysts. 

This list contains five funds with exposure to Russia: Fidelity Emerging Markets, Hermes Global Emerging Markets, MI Somerset Emerging Markets Dividend Growth, Lazard Emerging Markets and Fidelity Emerging Europe Middle East and Africa; all of which saw a slight recovery in performance in late April and early May.

Source: FE Analytics

Driving much of the underperformance in April across most emerging market funds were holdings in the country’s largest bank, Sberbank, which was among the worst hit despite not being targeted by US sanctions.

Sberbank’s share price fell by over 20 per cent on the Monday following the sanctions announcement and is a widely held stock across most emerging market funds. This is important as Sberbank is considered a proxy for Russia.

Since then, higher oil prices and a stable rouble has led Russian equities to hold up relatively well compared to emerging markets in general.

However, other developments in emerging markets have seen these funds sharply sell-off in May and June.

Country specific developments have meant there has been some dispersion in the performance of emerging market funds in May.

For example, funds that have a high exposure to Brazil will have suffered on the back of the truckers’ strike, in response to the government’s proposal on the variable tax structure of oil.

Likewise, funds that have a high exposure to Turkey and Argentina would have suffered on the back of a strengthening US dollar and rising Treasury yields. On the other hand, China and Russia were strong performers during the month. 

In June, emerging markets across the board are seeing a sharp sell-off, driven by political risk which is taking centre stage.

Regions where investors are wary of the political situation have been hit the hardest.

For example, Brazil’s current weak government and a presidential election which is already sending populist waves through markets, pricing in a win from the far-right in the form of Jair Bolsonaro, or veteran leftist politician Ciro Gomes.

Escalating trade tension between the US and China after the US pulled the trigger on covering $50bn in Chinese imports, led to a sharp sell-off in Chinese equities which, in turn, sparked a sell-off across global markets, with major exporting nations being hit the hardest.    

Tanvi Kandlur is a fund analyst at FE