| LONDON, July 25
LONDON, July 25 Foreign equity and bond
investors who had tentatively ventured back into Russia after a
huge early-2014 selloff are again slashing their holdings for
fear of being caught in the crossfire of Western sanctions.
Russia has fared worst among the big emerging equity markets
this year, with dollar-based losses of 13 percent.
The rouble is down 5 percent against the dollar,
second only to the Argentine peso, and investors are demanding a
2.8 percentage point premium to U.S. Treasuries to hold Russian
dollar bonds, 80 bps higher than January.
While sanctions already bar some Russian firms from Western
capital markets, Washington's assertion that the Kremlin
supplied artillery to Ukrainian rebels who are blamed for last
week's shooting-down of a Malaysian passenger jet may bring
another wave of sanctions that could cripple the economy.
Some analysts say sanctions may not in the end be tightened,
but many investors have not waited to find out.
"We took a decision to sell up our position. It's more to do
with risk management rather than fundamentals," said Aymeric
Forest, who runs a $5 billion multi-asset fund at Schroders.
That's a U-turn for Forest, who added to his Russia position
after the Crimea crisis earlier this year because of high
corporate dividends and cheap valuations. He said the decision
to sell was made as soon it became clear Washington would
ratchet up the sanctions.
Under existing sanctions, both U.S. and European investors
are barred from buying new securities issued by some Russian
companies that have a significant state shareholding or are seen
as close to the Kremlin. Many such as Forest fear these
restrictions may soon extend to existing stocks and bonds,
forcing investors into a firesale of the assets.
"Legal and political risks have escalated ... we had a small
position and we liquidated completely," he added.
On Russian equity markets, where freely traded shares make
up 29 percent of the capitalisation, foreigners' share is 19
percent, down from 21 percent in December, according to the
Macro-Advisory consultancy in Moscow.
June fund flows data from Boston-based fund tracker EPFR
showed emerging market investors who had been pessimistic on
Russia since the start of the year had actually swung to a big
overweight - meaning they held more Russian stocks than the
country's 5.4 percent weight in the MSCI index.
That was due to easing tensions since end-May when Russia
struck a more conciliatory tone towards Kiev. But many of those
positions will have been washed out in July as the crisis
escalated, said Bank of America Merrill Lynch equity strategist
EPFR data for the past week showed investors pulled $172
million from Russia funds, the biggest outflow in six months.
Fogel advises clients to buy Russian equities at current
prices -- relative to expected earnings over the next 12 months
they trade at about half the emerging markets average.
But his view hinges on a positive outcome to the crisis,
without further sanctions.
"People are underweight Russia but that doesn't mean more
selling cannot happen, because investor confidence is quite
fragile," said Michel Danechi, portfolio manager at Swiss fund
manager EI Sturdza.
While share valuations and dividends are attractive in
Russia, Danechi says he is staying away from companies that are
under sanction, such as energy firms Rosneft and Novatek.
THERE ARE ALTERNATIVES
Salman Ahmed, global fixed income strategist at Lombard
Odier, also reckons both sides will take a step back, meaning
sanctions are unlikely to be tightened further. But his fund
remains underweight in Russian rouble debt relative to its 10
percent weight in the benchmark GBI-EM index for local currency
Rouble debt was until recently seen as attractive because of
its 8 percent-plus yields - boosted further by the central
bank's half point rate rise on Friday - and JPMorgan's latest
client survey, conducted before the air disaster, showed a tiny
0.7 percent overweight.
On dollar debt and the rouble, most funds are underweight,
JPM found. The bank advised clients not to exceed index weight
on rouble bonds and to use credit default swaps to hedge risk.
Similarly Morgan Stanley said it was downgrading Russian
corporate and local bonds to underweight.
"Anyone involved in Russia must be cognizant that there will
be periodic blow-ups and short squeezes," Ahmed said.
"If you look at it from a relative asset angle, you will be
giving up 8.5 percent yield, but in South Africa or Turkey you
can capture similar yield with lower volatility."
Like Ahmed, many others see the West as reluctant to hurt
their economic interests by cutting off trade and investment
ties with Russia. President Vladimir Putin too will seek to
avoid conflict that may wreck Russia's economy, they say.
But that does not make them keen to venture in. For one,
Russian firms must repay $160 billion in the next year. Morgan
Stanley calculates. State-owned banks, that the EU is proposing
to ban from capital markets, have around $33 billion coming due.
Few expect default but the situation carries risks for
Russia's $475 billion reserves war chest.
Second, the economy is flirting with recession and capital
flight has already hit $75 billion this year.
Michael Cirami, co-director and portfolio manager at Eaton
Vance Investment Managers' global fixed income division,
believes the EU is unlikely to take any drastic measures but
that has not changed his pessimistic view on Russia.
"Ukraine is not the problem. Ukraine is the symptom of the
problem," Cirami said. "We've been bearish on Russia since 2010.
Oil dependency is huge...there is a broken growth model."
(Additional reporting by Chris Vellacott; editing by Philippa