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Some funds bet on quick rebound in Russia's sanctions-hit markets
[LONDON] Less than two weeks after the latest round of US sanctions plunged Russia's rouble to 16-month lows, some global funds have already stepped back in to buy rouble-denominated sovereign bonds and take advantage of the weaker currency.
Early this month, Washington imposed new sanctions on 24 Russians, striking at allies of President Vladimir Putin to punish Moscow for its alleged meddling in the 2016 US election and other "malign activity." Sparking a sell-off in Russian assets, the sanctions were just the latest series of penalties on Russian entities since Moscow invaded Crimea.
Yet after the initial market shock knocked more than 10 per cent off the rouble's value, investment flows appear to have returned to rouble Treasury bonds - at least according to the investment banking arm of state lender and the government's main primary dealer, VTB.
"Flow-wise, we noted that international real money accounts were cautiously better buyers at the beginning of the week," said Maxim Korovin, a strategist at VTB Capital, adding that local firms and hedge funds were still net sellers.
Russia's central bank publishes data on actual flows only intermittently. But overseas fund managers who have long taken a shine to high-yielding OFZs, or rouble government bonds, said they still willing to see through the geopolitical tensions to grab the returns.
"The fundamentals in Russia and some specific assets - OFZ and more specifically the currency - offer you reasonable risk reward or compensation for your risk at this juncture," said Liam Spillane, head of emerging market debt at Aviva Investors, a fund management firm with US$477 billion under management.
"We've been using the volatility to increase some of our positions ... When the currency sold off as much as it had, and the fundamentals are good and the valuations are attractive, we are comfortable adding a bit more risk at that stage." The weekend's news may have just added to the optimism after foreign ministers from the Group of Seven industrialized nations showed a united front in opposing Russia's destabilizing behavior but agreed to leave the door open for dialogue with Moscow.
Foreign investors - who hold almost a third of the OFZ market - have long held overweight positions in Russian treasury bonds, which offer a real yield of 4.7 per cent, compared with South Africa's 4.3 per cent or Turkey's 2.2 per cent.
In the wake of the sanctions, Russian treasury bond yields hit a near-five month peak, adding more than 60 basis points but they have shed about half of that since.
Yet it was Russia's currency that took the biggest hit from recent measures.
The rouble has been one of the worst-performing emerging market currencies, weakening more that 6 per cent against the dollar and more than 8 per cent against the euro in 2018. That was nearly on par with Turkey's lira, widely considered one of the most vulnerable emerging markets.
Having traded below 60 to the dollar most of the time since early 2017, the latest round of sanctions pushed the currency well above that key threshold.
Paul McNamara, investment director for emerging markets at GAM London Limited, an asset management firm with US$166 billion of assets under management, has also bought into the rouble since the last round of sanctions.
"It is marked out as one of the emerging markets where sentiment is weakest," he said. "But we bought some roubles since the news broke - with the oil price north of US$70 per barrel you have to feel that dollar-rouble belongs below 60." Others were more sceptical. JPMorgan acknowledged in a recent note that "assets look cheap" if seen through the prism of the real effective exchange rate (REER), but it added that fundamental valuation models offered little anchor in current conditions.