The third quarter of the year was very volatile for Russian markets. The two-week growth was broken and markets experienced a fall of 13% after US lawmakers proposed “the sanctions bill from hell” in reprisal for alleged Russian meddling in US elections. This includes limits on trading new Russian government bonds and additional sanctions on the seven largest Russian banks. Despite the fact that the bill is far off from being effective, it was enough to send the Russian markets into free fall because a lot of investors were concerned about the threat of sanctions and started selling off Russian assets. The Russian currency also lost 11% during the same period.

At the beginning of September, the situation on Russian markets was significantly changed. Investors realized that the nuclear option of sanctions concerning sovereign debt is still seen as an unlikely scenario especially after the Treasury report (earlier this year) highlighted that it would be damaging to foreign investors who own about 28 percent of the market. This and attractive fundamentals such as falling inflation, low unemployment, growing forex reserves and a recovery in the oil prices led to investors showing demand at the current levels. As a result, the MSCI Russia Index erased all losses and increased by 3.75% in the third quarter. The Russian Federation First Mercantile Fund grew by 6.1% this quarter, bringing its YTD performance to 9.0%.

Looking ahead, we believe that the Russian market will continue to remain unstable in the fourth quarter, mainly due to expectations of new sanctions and the geopolitical tensions. Turmoil in global trade with a rising protectionism, fluctuations of commodity prices, trade wars and sanctions used as a geopolitical tool – all of those will be instability factors for emerging markets and the Russian market won’t be an exception.

In general, we have an optimistic outlook on Russian equities in the medium term, as does the International Monetary Fund (IMF), which has raised its projections for Russian economic growth in 2019 to 1.8%, from 1.5% in its July report.

Domicile: Bermuda Source: Bloomberg, AP Asset Management

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