With rising political tensions between Russia and the West – primarily the US – and new trade sanctions placed on Russia, the question for investors is: do you stay or do you go? According to one long-time Russian investor, Martin Currie Investment Management, the risks are not so different from risks in other emerging markets.
Kim Catechis, the head of emerging markets for Martin Currie, based in Edinburgh, says: “I have been investing in Russia since 1998 and, in some ways, nothing’s changed. Generally, in every market you go into, if you are not a local you need to have your eyes peeled.”
Catechis and his team, which has an average emerging markets experience of 18 years, have been working together for more than a decade. There is hardly a company in any of the 27 emerging markets in the index that they haven’t analysed.
He advises investors to look at a company and see where its interests stand in an economy’s overall structure, including where it stands in the country’s power structure.
“For example, if you are an investor in a business like food retailing you will usually not be in conflict with anyone. The company will probably pay tax, employ citizens, pay its national insurance and all that. So, it will probably be quite safe,” he says.
“But every country has its red lines, which will reflect either cultural or historical hangups. In Russia, the main area where national interests tend to override all others is in natural resources. And Russia has huge natural resources.”
Catechis says that Russia has already had four years of “surgical sanctions” ordered by former president Barack Obama so that a second round may not have a lot of impact because there has already been import substitution in certain areas, such as dairy products, and the Russian economy is coming out of recession.
Martin Currie does not own shares in any of the companies named by the US Treasury. It sold out of a big retailer just before the political dramas, but that was for stock-specific reasons, Catechis says. The firm continues to hold two stocks: Sber Bank and Luk Oil.
“For us it means nothing,” he says, “but if you wonder whether the economy will deteriorate, we don’t think so. Corporate Russia has pretty much deleveraged and on top of that oil prices have popped back up. Before the latest round of sanctions, we though that interest rates would be cut, but now we think they will probably delay that and see how things go. The most affected companies will probably get some [government] help.
“Even before the latest sanctions, Russia had the highest yield in the emerging market asset class, so it was already cheap. And the rouble was already considered to be very cheap.”
Martin Currie’s flagship emerging markets portfolio is a concentrated one, with about 40 names, in which Russia is roughly neutral against the index.
While it’s a bottom-up manager it also has a “healthy respect” for top-down factors, Catechis says. “They are sources of risk, for us, not alpha.”
The Martin Currie emerging markets fund has had very strong performance in recent years. It returned 34.51 per cent for the 12 months to March (32.99 per cent after fees) compared with the benchmark’s 24.25 per cent, and 14.81 per cent for the three years to March (13.51 per cent after fees) compared with the benchmark’s 8.66 per cent.
Greg Bright is publisher of Investor Strategy News (Australia)