ING IM’s Nathan Griffiths sees undervalued Russian market

The outlook in the short term is uncertain for Russia, but for long term investors the market represents significantly undervalued opportunity, says Nathan Griffiths,lead portfolio manager emerging market equities at ING Investment Management.

Our best estimation of the current situation is that Russia has achieved its strategic goals with the annexation of the Crimea. It is, of course, not entirely certain that Russia’s intentions were to annex the Crimea. Russia‘s intentions could also have been to ensure that the Crimea would not become part of an expanded North Atlantic Treaty Organization (NATO) alliance, along with Sevastopol. At this moment, we don’t believe that Russia has bigger ambitions with regard to the rest of the Ukraine.

Western sanctions, so far, have been limited in scope to key individuals in the Russian administration involved in the Ukraine, and more recently extended to some of president Putin’s inner circle. These sanctions are relatively tame considering the harsh rhetoric from the US and EU. However, it has been emphasised that more sanctions will only be triggered when Russia makes further expansionary moves.

The direct economic impact of these sanctions is very limited, as they are meant to discomfit some key individuals. Though there are indirect impacts, as the Central Bank decided to calm financial markets by raising interest rates by 1.5%. This move will further weaken an already struggling economy. At the same time, the situation has accelerated capital outflows that now stand at almost $70bn. And considering that international companies will probably put all inward investments on hold, we believe this will further stunt the economy and potentially lead to a recession in 2014.

The EU, in particular, is very reluctant to engage in more impactful actions towards financial companies and the energy sector. With a market share of more than 30%, Russia is Europe’s most important supplier of natural gas.

Despite the attractive valuations, we remain cautious on the outlook for the Russian equity market in the short term. Up until now, there is a greater risk of escalation than a roll back of moves. Also, the concerns that foreign investors have about the risk to their holdings in the country mean they are more likely to reduce than increase exposure, which could lead to further market weakness. Nevertheless, equity markets are inherently resilient to these kind of crisis situations and Russia has always been a higher risk market.

No news will be good news, and without further developments in the form of either Russian encroachment or more aggressive sanctions, the market is likely to regain some of its losses in the coming months. Our current investment strategy is to hold relatively high cash balances, because of the fluidity of the situation. Furthermore, we have a preference for companies with jurisdiction outside of Russia. When events stabilise – the annexation of the Crimea is basically a fait accompli – we will become more constructive.


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