Home / Watch EU politics for possible Russian market rebound

Michael Hanson-Lawson 
It’s not just in the general media but also in the investment world: Russia gets a lot of bad press. And, of late, the press couldn’t get much worse. Sanctions are biting the economy and the rouble has plummeted. Meanwhile, Vladamir Putin remains steadfast in his aggressive stance to his neighbours and the west.
There are a handful of factors, however, that if combined in a timely fashion could create the germ of an investment opportunity. One of them – the possibility that the European Union could lift its trade sanctions next January – might even be the catalyst for a market resurgence.
The EU’s sanctions, which were extended to January because of Putin’s refusal to back down over the Ukraine and which have had far more impact than the US’s sanctions, will only be lifted if a ceasefire in the Ukraine appears permanent.
“That would be a massive move for the Russian market,” according to Michael Hanson-Lawson, the chief executive of East Capital Asia, the Hong-Kong arm of the specialist Russia and Eastern European equities manager East Capital.
Hanson-Lawson set up East Capital Asia in 2006 as a distribution point in the region. The Hong Kong office of 10 professionals now includes portfolio managers and analysts.
On one of his regular visits to Australia last week, Hanson-Lawson said the Russian investment story, as a diversifying factor in the global portfolio of institutional investors, was a constant. Russia’s GDP, at about US$12,500 per capita, remained at the high end of the emerging market universe, despite the current recession.
“If the rouble stabilises, too, that would be very positive for investors, allowing interest rates to come down further,” he said.
East Capital is one of the largest investors in Russia, often in the top few shareholders of the companies in which it invests. Its Eastern European fund accesses 19 Eastern bloc markets. It also recently invested the largest Easter European mandate for a Gulf state sovereign wealth fund.
“Russia is extremely cheap at the moment, so it’s a value story,” Hanson-Lawson said. “But it’s also a dividend story because the market is up to an average yield of about 5 per cent, following pressure exerted on companies by managers such as ourselves.”
East Capital believes the Russian economy will contract 2-2.5 per cent this year but will turn around next year to post a positive growth rate of about 2 per cent.
“There’s been a lot of consolidation in the economy,” Hanson-Lawson said. “The leaner, better managed, companies are doing a lot better now. EPS [earnings per share] growth was above expectations in the second quarter and retail sales were up slightly in July after being down in June.”
The whole of the emerging market universe, of course, is plagued with investor doubts at the moment, due to China’s economic and market problems, Brazil’s downgrade and the strength of the US dollar. For the brave long-term investor, such conditions mean opportunity.
Hanson-Lawson said: “Is now the time to buy emerging markets? Obviously they are bombed out right now. And also the growth patterns are changing with the various trade agreements… Their currencies are bombed out and the situation is exacerbated by China. The flows are at their lowest that they’ve been for a long time… But, with Russia at least, the politics often cloud investment decisions.”
East Capital, which has diversified into a global emerging and frontier markets manager, set up in Stockholm in 1997. It has offices in Oslo, Estonia and Dubai, as well as Hong Kong.