Russia’s intervention in Ukraine’s Crimean peninsula on 28 February caused an international crisis that has spilled over into the wider region, causing stock markets to tumble over fears of a prolonged stand-off, sanctions against Russia and potential conflict.
The three funds with the highest exposure to the Russian region in the IMA Global Emerging Markets sector have all taken a significant hit since 1 January 2014.
Performance of funds vs sector and index in 2014
Source: FE Analytics
The £12.2m Templeton Global Emerging Markets fund has a 22.05 per cent exposure to the region and has fallen 7.02 per cent since the beginning of 2014.
The £14m Neptune Emerging Markets fund has a 15.19 per cent exposure to the Russian region and has fallen 6.3 per cent since the beginning of 2014.
Schroders' £661.7m Global Emerging Markets fund has an 8.71 per cent exposure to the Russian region and is down 5.6 per cent since the beginning of 2014.
Performance of index since crisis began
Source: FE Analytics
According to data from FE Analytics, the MSCI Russia index has fallen 11.94 per cent since the crisis escalated on 21 February.
The possibility of sanctions placed on Russia would be the key to further declines for funds with high exposure to the region, according to AFI panellist Paul Warner, managing director of Minerva Fund Management.
“So far, markets have been relatively sanguine, but if sanctions are placed on Russia such as a restriction on its oil and gas exports, asset freezes and travel restrictions, or Russia is kicked out of G8, stock markets would be negatively affected,” he said.
“In that scenario, it would not be a good time to buy stocks. It was only in 1998 that Rusia reneged on its debt, and who knows, maybe Gazprom will turn off the gas again?”
“But there’s no denying Russian stocks are looking very cheap, so if sanctions are not imposed and Russia is allowed to keep Crimea, you could definitely say they were a huge buying opportunity.”
“However, it’s a complete unknown and depends on the actions of politicians which are never easy to predict.”
In the event of a thaw in the diplomatic stand-off between Russia and Ukraine, without the imposition of sanctions, Warner advises investors look at the £179.4m Jupiter Emerging European Opportunities fund, co-managed by Katherine Langridge and Colin Croft.
Craig Botham, emerging markets economist at Schroders, told FE Trustnet last week the crisis in Ukraine could generate a stagflationary shock to the world economy, knocking back equity markets and causing commodity prices to balloon.
He said that sanctions placed on Russia would likely hit its oil and gas exports.
The Russian stock market took its biggest tumble on 3 March for five years. The MICEX index of Russian equities fell 10.8 per cent while yields on rouble sovereign debt rose sharply.
The Central Bank of Russia also raised its key interest rate by 150 basis points to 7 per cent, over inflationary fears.
Consumer confidence in Russia has also been negatively affected by the unfolding of the crisis, despite a brief boost from the Sochi Winter Olympics, research from MNI shows.
The MNI Russia Consumer Indicator fell to its lowest level today since the survey started in March 2013, following a sharp decline in consumers’ views about the current state of their personal finances.
The Sochi Winter Olympics provided some upward momentum, boosting consumer sentiment, but the consumer indicator declined 5.2 per cent on the month to 94.1 in February from 99.3 in January.
Asked specifically about the impact of the Olympics, more than 70 per cent of respondents said that the Games would not be successful in boosting Russia’s economic growth. Consumers were dissatisfied with both their current conditions and future expectations.
The current indicator fell by 3.3 per cent on the month to 98.6, from a record high of 102 in January.
The expectations indicator saw a larger decline of 6.5 per cent, falling to 91.2 in February from 97.5 in January.
“Last month’s pre-Sochi rise in consumer sentiment was short-lived, with confidence falling sharply in February,” said Philip Uglow, chief economist at MNI Indicators. “Concerns over prices intensified this month, with the sharp decline in the rouble adding to inflationary pressures.”
“Since the survey was taken, the situation in Ukraine has intensified and Russia has been thrown into economic chaos. It’s difficult to see confidence going anywhere but down next month as well.”
