Almost half of the delegates attending Expert Investor Sweden in Stockholm last week expect that the European economy will suffer long-term damage from the renewed conflict with Moscow. This is a much larger percentage than the crowd in Amsterdam this week, where only a quarter of the audience expected the conflict would hurt the economy. Moreover, eight in 10 fund selectors attending the conference said they have recently reduced their allocation to European equities.
Will the conflict between Russia and Europe cause long-term damage
to the European economy?
A demerging market?
So Anna Väänänen, the manager of the Credit Suisse Equity Russia Fund presenting at the conference, was up to a formidable task convincing the sceptical Swedes of the opportunities still to be found in the Russian equity space. One fund selector set the tone for the discussion, dismissing Russia as a ‘demerging, instead of emerging market,’ which is non-investable because of the Western sanctions and the lack of rule of law.
Have you reduced your weighting to European equities?
Väänänen, a citizen of another long-standing subject of Russian aggression, Finland, agreed to a large extent, saying many Russian companies are a very risky investment. “As a rule of thumb, you have to be very careful to invest in a company which is dependent on the state. The financial regulator is used as a political tool.”
Beware of the state
That said, nowhere valuations are as low as on the Russian equity market, but there is a reason for that: state dominance. Roughly 60% of the total market cap of the MSCI Russia Index is controlled by the state. This percentage is only surpassed by China.
Tim Matthews, portfolio manager of the Schroders Global Emerging Markets Fund who also attended the conference, prefers to shun state companies. “You have to be cautious with state companies. Probably about 30% of the MSCI EM Index consists of state companies, and that’s why we are underweight Russia. We wouldn’t invest in state-owned banks in China, Russia or Brazil.”
“My experience is that Russia is not like a Western country and it will never be. But despite all the pitfalls, there are opportunities,” Väänänen concluded. That Russian GDP growth is stalling as a consequence of mismanagement of the economy combined with the Western sanctions and the Russian countersanctions, is not necessarily a problem. “You should increasingly look beyond growth numbers. There are always areas which show secular growth.”
One of such sectors is healthcare, Matthews underlines. “Our Russian holdings have started to bite, but healthcare is an opportunity. Its weight in the index is only 1%, but it is a very interesting place to be. The requirement for healthcare will undoubtedly increase in an ageing society like Russia, so we see benefits in owning health care providers and healthcare equipment makers.”
Click here to see a slideshow of photos taken at Expert Investor Sweden.
Platinum members can additionally view a full breakdown of the event voting data here, as well as long-term comparison graphs on the main asset classes here.
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