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Hermes EM equity head: why I’m tactically cautious on Russia

Hermes EM equity head: why I’m tactically cautious on Russia

Tactical exposure to state-owned Russian companies might prove a good investment, but the country remains hostile to long-term investors, Citywire AA-rated Gary Greenberg has said.

Greenberg, who is head of emerging markets at Hermes, made the comments in an investor update.

The sector veteran, who runs the Hermes Global Emerging Markets fund, said investors are waiting for a possible deal between Putin and the West to see the sanctions lifted, which could provide a short-term boost for markets.

‘Recent events dictate that tactical investment based on the fundamentals of a company and its leader’s relationship with the Kremlin would be a good start. But this environment remains hostile to the interests of long-term investors such as ourselves,’ he said.

‘An agreement between Putin and the West, however embryonic, would spark a rebound and reward investors who either stayed the course or bravely bought in on the rouble’s Black Tuesday last December. The absence of such an accord would keep those investors waiting, and probably distressed,’ he added.

Greenberg also highlighted that the Russian stock market, which was down 48.5% in dollar terms in 2014, is currently trading at two standard deviations below its long-term average, relative to both itself and global emerging markets on a price-to-earnings basis.

Greenberg, who previously named-checked Russia as a cheap market, currently has a 2.4% allocation to Russia in his €417 million fund. This is compared to a benchmark allocation of 3.2%. 

Putin: a man out of his depth

Greenberg said six months ago Vladimir Putin was seen as a grandmaster of geopolitics, having outmanoeuvred President Obama in Syria, asserted authority over Crimea and signed a 30-year energy deal with China. However, much of these gains have now been eroded by economic actions.

‘Today, with the rouble at about 67 against the dollar – compared with 33 in the summer of 2014 – and the Russian economy sinking, he looks more like a man out of his depth,’ he said.

He added that the central bank of Russia forecasts the nation’s GDP to fall by about 4.5% this year and by 0.9% in 2016. ‘The recession could worsen when sanctions start to seriously bite, which will make it difficult for the government, banks and corporations to refinance both internal and external debt.’

With about $400 billion in reserves, Russia can again deploy stimulus to weather the recession but its budget is weak, Greenberg said. ‘The country has few moneyed friends, and will be forced to implement unpopular cost-cutting reforms, meaning the government’s popularity could slide.'

Greenberg believes Putin's next move is likely to see him persist with nationalistic rhetoric while looking for a face-saving deal with the West.

‘A slow-burning conflict in Ukraine serves his purposes well, but at some point he needs the sanctions to lift or the domestic economy will break. It is unlikely Russians will be happy when their incomes decline and their flat-screen televisions are repossessed, or HBO is replaced by Cuban or Chinese state broadcasting,’ he said.

Over the three years to the end of January 2015, the Hermes Global Emerging Markets fund returned 26.85%. This is while its Citywire-assigned benchmark, the MSCI EM (Emerging Markets) TR USD index, rose 8.05%.

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