I took the decision in the middle of last week to start investing in the already battered Russian equity market, selecting Robin Geffen’s Neptune Russia & Greater Russia fund. Thankfully it was a modest investment, accounting for less than 2 per cent of my ISA. This, in part, is why I selected an open-ended fund – I’ve written on a number of occasions about my grievances with broker fees.
So why did I buy? Simple really – because I felt the Russian market was extremely cheap. The MSCI Russia index was trading on a valuation four standard deviations cheaper than its average at the beginning of the year, and by 10 December it had fallen a further 35 per cent or so in sterling terms.
Performance of fund and indices Jan – 10 December 2014
Source: FE Analytics
“Buy when there’s blood on the streets” is one of the few catchy phrases in investment that I happen to think carries weight. There are plenty of headwinds facing Russia, of course, with the prospect of an all-out collapse in its currency a real possibility. The falling oil price and economic sanctions have been the biggest contributors, though many experts see both as relatively short-term phenomena.
Oil is currently trading at its lowest level since the financial crisis. While OPEC recently said it would be willing to let the price fall to as low as $40, the general consensus is that it will rebound to more normal levels over the medium term. A low oil price, it seems, is too damaging to too many economies.
The longevity of the West’s economic sanctions on Russia depend heavily on Vladimir Putin’s actions, but again there are hopes that negotiations will gather momentum in the new year.
And yes, before you say it, investments based on hope often come back to bite you. The fact remains, however, that Russia is almost as cheap as it was in the depths of one of the biggest financial crises ever and has never been on a bigger discount compared to the MSCI Emerging Market index.
I felt comforted by the fact I have such a long time horizon, and knew I was able to ride the volatility for many months, if not years.
Performance of fund and index since 10 Dec
Source: FE Analytics
By Tuesday evening, I didn’t feel quite so relaxed. The Russian government’s emergency measures to stabilise the rouble by rising interest rates to 17 per cent backfired, along with my decision to invest.
As FE data shows, my Neptune Russia & Greater Russia fund had shed an eye-watering 26.53 per cent – exactly the same as its MSCI Russia Large Cap index benchmark. Over the same period, the FTSE All Share fell just 2.47 per cent.
So I didn’t get in at the bottom – not by a long shot. Never before have I seen one of my investments fall by such a margin, so quickly. I’ve tended to avoid investing in stocks because I view diversified portfolios as much safer investments, but recent events have proven – albeit not for the first time – that even a basket of companies can freefall.
I took the decision not to panic sell, however, and actually topped up my holding on Tuesday night. Even the best fund managers seldom time the market perfectly and while massive headwinds remain, my reasoning for buying the fund remains true – Russia is the cheapest equity market in the world.
If you’d bought the FTSE a month before it bottomed in March 2009, for example, you would have been sitting on a loss of 15 per cent by 3 March. However, the index has more than doubled since February 2009.
Performance of index since Feb 2009
Source: FE Analytics
I’m not suggesting Russia has definitely bottomed, but it’s usually better to be too early than too late.
Neptune Russia & Greater Russia has actually bounced back in the last couple of days, returning more than 14 per cent yesterday. However this is very much a long-term play and I have no plans of selling any time soon.
Whitechurch managing director Gavin Haynes also has a small weighting in Russia and agrees that selling at this point would be a mistake.
Haynes says you have to be careful not to fall in love with your own idea and keep buying as markets fall; however, as long as you’re prepared to put up with short-term losses he says Russia is one to hold.
“All you’re doing there is crystallising your losses. As long as it’s a small part of your portfolio, I think it’s one to hold at the moment,” he said.
“Even Putin has come out and said that the recovery will take at least two years, but the valuations at the moment are pricing in an Armageddon scenario. It’s one where you need to hold your nerve and lock the money away, as the recovery could be very sharp.”
Haynes adds that Geffen (pictured) is invested in the higher quality end of the Russian market, giving his portfolio some protection.
What do you think of my decision to stick with Russia? Are there any value plays you are currently making? If so leave a comment below or email us at editorial@financialexpress.net.