The dreadful nerve agent attack on the former Russian spy Sergei Skripal and his daughter Yulia in Salisbury on March 4thwas a shocking example of how far president Putin is willing to go to satisfy old scores. His subsequent unwillingness to stop the Syrian government’s use of chemical weapons virtually guaranteed a military response.
Missile strikes are obviously dramatic, but it is the economic sanctions that will have the bigger long-term impact. The initial measures that were put in place following the incident in Salisbury have had severe financial implications and further steps are expected possibly as early as today.
The first round of sanctions placed restrictions on 24 Russian oligarchs and officials, together with 12 related companies. Those affected included Oleg Deripaska, whose links to Rusal, which is one of the world’s largest producers of aluminium, led to its share price and that of its parent company EN+ Group falling around 50%. The broader Russian stock market is also down sharply.
There are 3 investment trusts with significant exposure to Russia and all of them have been badly affected. JPMorgan Russian Securities (LON:JRS)is the only single country mandate operating in this area and its shares are down around 13% in the last month.
JRS has recently announced that only one of its 33 holdings, Rusal, is directly subject to the additional sanctions announced on 6thApril. The company accounted for about 1% of the portfolio at the end of February and the Board is currently implementing the necessary actions to comply with the new restrictions.
Russia is the cheapest of the major stock markets and is now trading on a PE ratio of 7x historic earnings and yielding around 5%.
The more important issue is the threat of what might follow and the impact that this has had on investor confidence. Stocks like the state-owned bank Sberbank, the trust’s largest holding, have suffered sharp sell-offs and are down more than 20%.
With all of these problems it would be easy to dismiss the case for investing in the country, but contrarians with a high risk tolerance might want to think again. Russia is the cheapest of the major stock markets and is now trading on a PE ratio of 7x historic earnings and yielding around 5%.
The analysts at Numis believe that JPMorgan Russian is an attractive way to gain exposure as it benefits from a highly-experienced manager who focuses on making long-term investments in structural growth companies with robust corporate governance and strong balance sheets. It is currently trading on a discount to NAV of 13% and the shares are yielding 4.6%.
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If a single country fund feels like a risk too far there are two other investment trusts that provide a significant albeit more diversified exposure, but in both cases you need to make sure that you are comfortable with the high volatility and be prepared to ride it out.
BlackRock Emerging Europe (LON:BEEP)aims to generate capital growth by investing in companies that do business in Eastern Europe, Russia, Central Asia and Turkey. At the end of January Russian stocks made up 58% of the portfolio with Sberbank being the largest holding at 8.6% of the assets. In the last month the shares in the fund are down 14.6% and they are trading on a 5.5% discount to NAV.
Baring Emerging Europe (LON:BEE) provides exposure to emerging European securities and at the end of January it had a 59% weighting in Russia with Sberbank again the largest holding at 10.9%. In the last month its shares have fallen 14.3% and they are trading on an 11% discount and yielding 4.4%.