Negative sentiment significantly impacted the Russian stock markets in late February as tensions between Russia and Ukraine escalated following the annexation of the Crimean peninsula, allegedly instigated by Russian forces.
While our data suggests that the diversified funds with significant holdings in the region have managed to make money nonetheless, Abi Oladimeji, head of investment strategy at Thomas Miller Investment, says that the worst is still to come and the impact could stretch well beyond the region.
"So far, the impact of the crisis has largely been confined to the Russian markets where equities have sold off and the currency has been very volatile,” he said.
“Beyond Russia, the financial market response has been relatively muted. However, investors must not get complacent. Clearly, there remains lots of scope for the crisis to escalate and undermine investor sentiment.”
"With global growth slowing in recent months, the last thing financial markets need is a significant negative shock coming from a trade war or military stand-off between the West and Russia.”
“While such an outcome will have far reaching consequences, in the developed economies, the bulk of the damage will be felt in Europe, which receives some 40 per cent of its natural gas supply from Russia. The region’s nascent recovery could be nipped in the bud by a significant energy price shock.”
“Elsewhere, a severe escalation of the crisis, with negative knock-on effects on global trade, could be the trigger that turns weak growth in the major emerging markets into outright contractions. It also has the potential to turn modest growth in the major developed economies into stagnation.”
“Financial markets could be particularly vulnerable to any negative shocks during the summer months as volumes will typically be lower and volatility may therefore be amplified.”
FE data shows the MSCI Russia is down 12.86 per cent compared to a rise in the FTSE World of 1.9 per cent since 21 February as investors have poured money away from the country fearing the negative impact of economic sanctions against Russia.
Performance of indices since 21 Feb
Source: FE Analytics
However, the Blackrock Emerging Markets, Fidelity Emerging Markets, Schroder Global Emerging Markets, Templeton Global Emerging Markets and Threadneedle Global Emerging Market Equity funds have all returned a profit since that date.
On the other hand, all five funds returned less than the IMA Global Emerging Markets sector average, which was 3.2 per cent over the same period, but the fact they turned in positive numbers will be a relief to worried investors.
The best performing of the five is the £187m Threadneedle Global Emerging Market Equity fund, which returned 2.52 per cent over the period.
The fund, managed by Irina Miklavchich, has 5.9 per cent of its portfolio exposed to Russian equities.
Over three years it has outperformed the sector, making a loss of 6.55 per cent, compared to an average loss of 9.14 per cent. It also stayed ahead of its index which fell 9.58 per cent over the same period.
Performance fund, sector and benchmark over 3 months
Source: FE Analytics
The £11.9m Templeton Global Emerging Markets fund, which has the highest level of exposure - 18.9 per cent - invested in Russian equities, has returned 0.17 per cent since 21 February.
Its largest stake in a Russia company is in the oil company Lukoil, which it has 4.6 per cent of its portfolio invested in, its sixth largest holding.
The fund is managed by Mark Mobius who believes the crisis will dissolve as the economic stagnation of the Russian economy becomes more entrenched from sanction.
The Blackrock Emerging Markets and Schroder Global Emerging Markets funds have 5 per cent and 7.74 per cent in Russian Equities.
Paul Warner, managing director of Minerva Fund Management, says that investors should be wary of the prognostications of doom.
He says that these funds may well have taken the opportunity to pick up Russian stocks on the cheap, and investors should at least stick with the exposure they have got.
“It would give them an opportunity to buy into Russia more cheaply and as some of the managers are value investors are therefore likely taking a longer term view,” he said.
“Those fund managers have probably followed the old motto of ‘buy when there is firing in the streets’ and they have taken the view that three years from now the situation will change.”
“But investors buying these funds have got to believe that the managers’ predictions are correct and be prepared to invest for the longer term.”
“The problem with the situation is nobody really knows how this thing will unfold, as no one can look inside Putin’s head.”
“There is little doubt that the Russian economy is being hit badly by the sanctions due to capital flight and further sanctions will ratchet that whole thing up, making Putin’s next move even harder to predict, it is possible the Russian index could see further falls.”
A number of emerging market managers viewed the crisis as a buying opportunity in March, as FE Trustnet reported at the time.
Warner has personal exposure to Russia in an ISA which he says he doesn’t plan to move anytime soon.
Emerging markets have in general have had a torrid time over the past year after hints the Fed was planning a taper of its monthly stimulus program and raising interest rates.
These expectations, coupled with a slowdown in China, have been widely seen as the main drivers behind a severe sell-off of emerging market assets since May 2013.
Since mid-May 2013, the MSCI Emerging Market index has lost 12.31 per cent, FE Analytics shows, with the many funds in the IMA Global Emerging Markets sector losing more than this over the same period.
The £473m Fidelity Emerging markets fund, run by FE Alpha Manager Nick Price, has been the best performer in the sector over the past year, making a loss of 3.08 per cent compared to an sector average of 10.25 per cent and fall in its benchmark of 8.93 per cent.
Despite 8.4 per cent of its portfolio in Russian equities, it has made 1.22 per cent since February 21, demonstrating Price’s ability to protect against the downside.
