Jason Corcoran in Moscow
06 April 2009
After the sell-off, hopes of good returns are rising
Like heroes inspired by the firebird of Russian folklore to undertake the most dangerous of quests, investors are returning to a resurgent Russian stock market in the hope of riches.
Norway’s $330bn (€249bn) state pension fund, one of the world’s largest sovereign wealth funds, last month awarded Prosperity Capital, the largest foreign fund manager operating in Russia, its largest mandate.
G2 Group, a Swiss family office, has taken large equity stakes in two Moscow investment firms, Da Vinci Capital and Diamond Age Advisors.
Swedish fund manager East Capital has increased its Russia weighting in its largest fund, the $500m east European fund, from 40% to 57%, the highest level in its seven-year life.
Karine Hirn, co-founder of East Capital, said: “Russia is extremely cheap now. It was by far the most oversold of the stock markets last year. In fact, the region of eastern Europe had 10 out of 20 of the most oversold markets in the world.”
Investor enthusiasm has pushed the RTS Index of leading Russian shares up 46% since its low point in late January. Higher oil prices, a stronger rouble and hopes that the international credit markets could soon be prised open for domestic issuers have helped improve investor sentiment.
But investors should bear in mind that, according to Russian folklore, while good fortune lies in store for whoever catches the firebird, trouble is normally close behind.
The Russian equities market has ruined investors twice in little more than a decade, with the RTS dropping 85% in 1998 and 75% last year, spurring investors to pull $290bn from the country between August and January this year, according to French bank BNP Paribas.
It was the combination of collapsing share prices and client withdrawals that forced Da Vinci Capital and Diamond Age Advisors to restructure themselves in the first place.
Alfa Bank co-founder Petr Aven last week warned that bad debts could reach 20% of total loans by the end of year, while finance minister Alexei Kudrin expects 10% in defaults.
Chris Weafer, chief strategist at banking group Uralsib, said: “The economy is still in decline and will need both a sustained rally in the demand for, and price of, commodities – plus a resumption of bank lending – to create new growth. These are more likely in the fourth quarter than in the second quarter, if they happen at all in 2009.”
East Capital’s asset managers said they are focusing on companies with low levels of debt, a strong market position and opportunities to benefit from sector consolidation.
Hirn said: “We are looking more at the balance sheets these days because there are financing issues that need to be resolved for many companies. We are happy to avoid real estate because the debt burden is heavy.”
Hirn said the firm’s east European funds had suffered a sharp fall in valuations since September but only suffered 10% in client redemptions. “We lost a huge amount in valuation in recent months but it was less brutal than 1998,” she said.
East Capital said Russia was still the strongest economy in eastern Europe with exposure to a large domestic market. It said countries dependent on exports such as Hungary and the Czech Republic are more vulnerable. Turkey and Romania also benefit from a strong domestic economy.
The manager last month launched a special opportunities fund to target assets in Russia and the Commonwealth of Independent States where valuations have declined sharply. The board of East Capital has agreed to put $50m in the fund when it launches during the second quarter of this year.
Moscow investment firm Da Vinci Capital also hopes to exploit cut-price opportunities in Russia through its new partnership with G2 Group, which manages $1bn in alternative assets.
Oleg Jelezko, managing partner and chief executive of Da Vinci Capital, said “Our strategy will be different now we are in recovery mode so we won’t need to pursue derivatives. It’s about using different asset classes such as bonds and special situations.”
Mattias Westman, chief executive of Prosperity Capital Management, said his firm’s Russian funds had received more interest from institutions in recent weeks.
He said: “Nothing very big, but it’s more constructive. We have endowments, pension funds and family offices considering further investment. Hopefully the Norwegians will help make Russia something that other major institutions feel more comfortable with.”
Flows into Russian equity funds hit a 19-month high in March, according to EPFR Global, a data provider that tracks funds. It said capital flows into Russian-dedicated funds rose from $7m in the week ending March 18 to $50m the following week.
However, inflows remain modest, as many investors are sitting on the sidelines waiting to see whether the rebound is just a bear market rally.
Angelika Millendorfer, head of emerging market equities at Austria’s Raiffeisen Capital Management, said: “So far our institutional and private investors are not returning to emerging markets. The relative performance of emerging markets has improved but investors are not yet making any substantial moves.”
Millendorfer said the big emerging markets funds and institutions continued to have low allocations to equities and to markets like Russia. She said: “I would be surprised if investors moved into emerging markets if the case for the developed markets does not return first. We need to have confidence that western banks will not collapse Lehman-style.”
Greater rouble stability and recent higher oil prices have been a major reason for domestic equity recovery but questions remain over the banking system, external corporate debt and the high level of inflation.
The biggest risk, partly because it cannot be quantified, relates to the level of non-performing loans in the banking sector and the future ability of big Russian corporates to pay or refinance the amounts they owe.
Posts
