LONDON, April 21 (Reuters) - Foreign investors’ relatively high exposure to Russian equities and the sector’s heavy focus on energy could add to pressure on the country’s stocks, which have struggled to weather recent political storms, analysts said.
Russia’s MSCI equity index has crept some 3% higher since the start of the year, not too far off gains made by the broader emerging market equity index despite Washington slapping a broad array of sanctions on the country, including restrictions on its sovereign debt market.
However, Russia’s stocks are lagging well beyond other energy dominated bourses such as Saudi Arabia, which has seen its index gain nearly 20% this year, helped by investors’ rekindled appetite for energy exposure and flows from local investors with deep pockets.
“Domestic protests (in Russia) and geopolitics have something to do with this, as does a relatively smaller surge in local investor flows into equities,” said Hasnain Malik at Tellimer.
“The challenge for investors looking at Russia is to balance the oil price outlook, which does not have as appealing a long-term outlook as commodities geared to new technology, the risk of an escalation to sanctions that really bite, and, in some cases, attractive valuations in well-run companies,” Malik said.
Washington’s latest sanctions, imposed this month over Moscow’s alleged interference in the 2020 U.S. election, cyber hacking, bullying Ukraine and other suspected malign actions sent shivers through financial markets, though their impact on Russian assets was short-lived. The rouble swiftly returned to pre-sanction levels and stocks gained more than 5% last week.
SHRUGGING OFF SANCTIONS
While many believe those measures might have been just the opening shot, some are sticking with their exposure for now.
“We continue to see Russian stocks attractively valued,” said Alina Slusarchuk at Morgan Stanley, pointing to shares currently trading with a dividend yield of 8% over the next 12 months compared to a 6.9% five-year average.
However, sanctions headlines have probably limited flows into Russian equities year-to-date and offset positive factors such as commodity and oil price rises, Slusarchuk added.
While Russia’s position on international financial markets has waned for some time, investors are still very active in the country.
Analysing exposure to Russian stocks among 241 active emerging market equity funds, Steve Holden at Copley Fund Research calculated the average holding weight to be 4.11% at the end of March - more than 1% point overweight above the benchmark. Nearly 90% of funds were invested in Russia.
Holden found asset managers had aggressively reduced their Russia exposure after Moscow’s 2014 annexation of Crimea from Ukraine, with average weightings falling by 4.26% and more than 75% of all funds cutting back.
Now investors are keeping a nervous eye on clashes between Kyiv’s forces and pro-Russian separatists in eastern Ukraine and a build-up of Russian forces along the Ukrainian border that has drawn criticism from the United States and NATO.
“EM active managers will be wary of the Ukraine situation as a potential drag on relative performance,” said Holden, with energy firm Lukoil, the country’s biggest lender Sberbank and Russian internet giant Yandex seen as most vulnerable as they account for the bulk of the overweight position.
“Whether we see a repeat of 2014 remains to be seen, but do not underestimate an active manager’s willingness to cut or reduce allocations when the investment case becomes muddied by political events.”
Reporting by Karin Strohecker, additional reporting by Tom Arnold Editing by Gareth Jones
Source: Reuters