The international community has been further dragged into the fray after the MH17 commercial passenger airliner was shot down over Ukraine’s disputed territory, killing all 298 people on board.
The downing of the plane coincided with a fresh round of existing sanctions against Russia, and a host of countries and organisations have been calling for even deeper economic sanctions against Russia since the tragedy.
All of this has had a significant knock-on effect on the equity markets, and the funds with exposure to the region.
According to FE Analytics, MSCI Russia has fallen 11.85 per cent in 2014, compared to gains of 4.7 per cent for the MSCI Emerging Markets index and 3.15 per cent for the MSCI World index.
At the height of the crisis in March it was down more than 25 per cent and looked to recoup all of its losses, until last week’s developments.
The index has fallen 7 per cent over the past 10 days, hitting a number of fund managers who bought into Russia earlier this year on valuation grounds.
Performance of indices in 2014
Source: FE Analytics
With the international community under increasing pressure to take action against Russia, there are fears more losses could follow.
Here we look at funds with direct exposure to the troubled region, starting with the popular Global Emerging Markets sector.
Thirty-six of the 81 funds in IMA Global Emerging Markets have 5 per cent or more of their portfolios exposed to Russia, meaning that they are overweight relative to the MSCI EM index. Of these, six have 10 per cent or more in the country.
The two funds in the sector with the highest direct weighting to Russia are the £8.3m FP HEXAM Global Emerging Markets fund [23.1 per cent] and the £13m Templeton Global Emerging Markets fund [18.91 per cent].
The Hexam fund is one of the very few in its sector that has lost money so far this year, with losses of 4.81 per cent putting it firmly in the bottom quartile of its sector. Templeton has done much better, making 3.98 per cent.
Interestingly, these are the only funds among the 36 that have lost money over a three-year period.
By comparison the sector average return is 9.63 per cent and the MSCI Emerging Markets index has gained 11.76 per cent.
Performance of funds, sector and index over 3yrs
Source: FE Analytics
Four much larger and higher profile funds are also heavily exposed to Russia.
The £100m JOHCM Global Emerging Markets Opportunities fund has 10.82 per cent in the country, while Matthew Vaight’s £1.5bn M&G Global Emerging Markets fund and Richard Titherington's £127m JPM Emerging Markets Income fund have around 8 per cent.
Out of the 36 funds, 34 have recovered and made money since the beginning of the year when the crisis began to unfold.
However, following the one day’s trading since flight MH17 crashed, 35 are down. Unsurprisingly, it’s been the specialist funds focusing on emerging Europe that have been hit the hardest so far this year.
According to FE data, 12 funds have more than 50 per cent of their assets invested in Russia, and all have lost money this year.
Performance of funds in 2014
Source: FE Analytics
Neptune, JPM, Pictet and Barings – which all specialist in emerging Europe – have two funds apiece.
Robin Geffen’s Neptune Russia Special Sits fund has been the worst hit, losing almost 20 per cent year-to-date.
This puts it in the bottom three so far this year, throughout the entire IMA unit trust and OEIC universe.
Whilst the situation in Ukraine has had a significant impact on funds directly exposed to Russia, experts suggest it could also prove to be a headwind for others invested indirectly toward the country.
Talib Sheikh, manager of the £302m JPM Multi-Asset Income fund, says further escalation could hit European equity markets.
“As global investors we must acknowledge there has been a recent resurgence in geopolitical risk. It is very difficult at this stage to tell whether these events will have a major impact on financial markets,” he said.
“One thing they appear to have done is to interrupt the extended run of low volatility in markets—at least as far as equities are concerned.”
“If the situation in Russia were to escalate, Europe is clearly the most exposed region, and Germany in particular, adding some concerns about the European growth outlook.”
“Whilst these events serve as a reminder that there are plenty of conflict areas around the world that could flare up, and that investors need to remain vigilant and diversified, we still think that valuations remain supportive for risk assets compared to bonds.”
Global equity markets across the world fell following the events in Ukraine, with the FTSE 100 down a further 0.41 per cent today at the time of writing.
Jim Wood-Smith, head of research, Hawksmoor Investment Management also believes there could be an indirect blow to the European recovery following the downing of the Malaysian Airlines plane.
“I am concerned about the knock on effect of MH17 on the eurozone. One short term effect of disasters like this is to depress consumer spending, but it will also undoubtedly become more difficult to do business with and in parts of Eastern Europe,” he said.
“The ECB is already struggling to keep European inflation and growth in positive territory, a fight that can now only be more difficult. I suspect that the knee-jerk reaction to sell equities and buy bunds is the right one.”
However he says the importance of Russia’s natural energy resources to the global economy will mean economic sanctions are likely to be muted.
“It is inconceivable that the West will take any meaningful macro sanctions that would endanger the supply of Russian energy to Europe,” he said.
“So there will be all the usual huffing and puffing and electioneering, with politicians all hoping everything will have calmed down in a few months and everyone can carry on as if nothing ever happened. America has a certain amount of form, after all, when it comes to shooting down passenger aircraft.”
