Swedish managers: Russia gains from EM focus and oil price
Russia equity funds have been making strides this year off the back of renewed focus on emerging market generally, but also from the recovery in the global oil price – a factor that has a direct bearing on the country’s finances.
Fredrik Colliander manager of Carnegie Fonder’s Carnegie Rysslandsfond noted in early October that the local stock market gained 4.5% through September, with his own fund up 1.7% over the month.
“That the Fed left rates unchanged was positive for Russia and other emerging markets. The Russian market was also supported by Opec’s unexpected decision that the cartel will limit production to 32.5-33 million bpd. Brent oil was also up 4.5% over the month, that is to say exactly in line with the Russian market.”
Opec’s limits have been described by oil market analysts as the first proper deal to trim output in some eight years.
Tundra Fonder, another Sweden-based manager, said in its most recent manager note for its Rysslandsfond that Brent crude prices were up 35% since the start of the year through September. That compared with a rise in the fund’s benchmark index, the MSCI Russia (SEK), which was up 33.6% over the same period.
Elsewise, Tundra noted that Standard & Poor’s raised its credit outlook for the country from ‘negative’ to ‘stable’, while the Russian central bank was able to lower its interest rates by 0.5% to 10% thanks to lower inflation, which had subsided to an annualised rate of 7%. Meanwhile the PMI index for the manufacturing sector rose to 50.8, while for the services sector it was 53.5.
The inflationary developments in Russia over the past couple of years have been driven by the central bank’s reaction to the collapse in the price of oil from about $100 in mid-2014 to about $30 by January 2016. The bank drove down the value of the ruble in order to stave off the expected collapse in the economy.
Jacob Grapengiesser, partner at East Capital, and Uliana Esaulkova, senior analyst based in Moscow, noted recently that the receding inflation shock should tee up some recovery in consumption.
The macroeconomic situation remains challenging, they noted, including real wages remaining in negative territory; but overall they judge the situation to have moved beyond a trough, and that Russians themselves are slowly but surely starting to increase their consumption once more.
Figures from the retail trade point to a normalisation of consumer demand, while the improving inflationary environment creates expectations that the central bank could cut rates again, stimulating lower borrowing rates. This would reduce the incentive to save and therefore lead to greater consumption, Grapengiesser and Esaulkova suggest
“An example that shows that Russians are ready to consume more is the latest start of sales of Apple’s iPhone 7 on 23 September. According to Russian business magazine Vedomosti, initial sales were three times greater than at the launch of the previous model, 6S, in October 2015, when the uncertainty was at its peak.”
According to Morningstar Sweden figures, of a local universe of 28 Russia equity funds, the average return in from the start of the year to 24 October was some 44% in SEK terms
The best performing fund over the period has been Trigon Russia Top Picks Fund A, with INVL Russia TOP 20 and the Pictet Russian Equities P USD shares also doing well. All returned over 55%.
Even passive funds have produced strong returns, with the db x-trackers MSCI Russia Capped 1C returning close to 39%.
Trigon (albeit Estonian domiciled) notes that Russian stocks continued to be thinly traded, and that trading is often driven by reaction to politics rather than company fundamentals. It said it saw one of its holdings, diamond producer Alrosa, gain 20% in September alone.
These performances have not gone un-noticed in the Swedish funds market
Figures published by the Swedish Investment Funds Association show that not only were Russia equity funds the second best-selling category after Sweden equity funds in September, but that they are similarly the second best-selling equity fund category this year so far.
Investors put an additional SEK685m (€70.5m) into Russia funds on a net basis in September. In the first three quarters of the year, the net investments hit SEK1.524bn (€156.8m) – easily beating the Nordic and Europe equity categories, which respectively saw net withdrawals of SEK1bn and SEK6.297bn over the period.
That said, the overall assets in Russia funds of around SEK17bn (€1.75bn) as at the end of September meant it was well behind Sweden, Europe and Nordic equity categories.
As Trigon notes, recent years off economic sanctions and a harsh sell-off of Russian assets have contributed to valuations falling. However, with an MSCI Russia price/earnings ratio of 7x and dividend yield around 4.7% as at the end of September, this market looks attractive relative to others.