Investors in Ukrainian assets have been well rewarded on the back of the country’s improved economic performance. The local currency UX equity index is up 22 per cent year to date while the Euro denominated WIG-Ukraine Index is 33 per cent higher. That compares with a 15 per cent gain in the MSCI EM Index over the same period. Debt instrument investors have also shared in the gains with, for example, the yield on Ukraine 2020 sovereign debt dropping from 9.8 per cent at the start of the year to 8.2 per cent in early October. The performance of some corporate issues has been even better with, for example, the yield in the MHP 2020 Eurobond dropping from 12.1 per cent to 9.4 per cent in the same period.
The question now is whether the solid progress achieved in the economy over the past 12 months can continue, and drive asset prices even higher, or whether Ukraine is about to enter a more difficult and dangerous phase that may disrupt the recovery and again boost the perception of investment risk. Read more
Four years ago, Mongolia’s economy was the fastest growing in the world, the stock market was booming and the future looked very bright. This year, the consensus is for growth at no more than 1 per cent and all of the rating agencies have sovereign risk at speculative grade, while warning of possible default on debt obligations in 2017. Even within a troubled emerging market asset class, the case for Mongolia looks grim.
But, while accepting that Mongolia is certainly not for the risk averse, the investment case is worth a second look. Even the rating agencies concede that although the outlook is bad, based on what we assume today, the situation could “change on a dime” this year, and that would send debt yields sharply lower and equities higher. Read more
Investors in Russian equity and debt enjoyed, on average, a relatively better year than peers in other major emerging markets. The rouble-denominated Micex gained 17 per cent in the year up to Christmas week, while the dollar denominated RDX added only 0.3 per cent – the difference being accounted for by the 16.5 per cent year-to-date fall in the value of the rouble versus the dollar. Over the same period, the MSCI EM Index lost 17 per cent and the MSCI World Index was off 4 per cent. The yield gap applied to Russian sovereign debt, and that on issues from the biggest corporations, contracted substantially despite the cut to sub-investment grade by two rating agencies earlier in the year.
Valuations started 2015 excessively cheap because of political and economic fears that proved unfounded. The conflict in eastern Ukraine did not spread further and sanctions were not added to. Domestically the government’s response to falling oil revenues and tough macro conditions was pragmatic and effective. For sure nobody can say that 2015 has been a good year for Russia; what we can say is, “it could have been a lot worse”. Read more
A great deal has been written about the opportunities waiting for both strategic and portfolio investors in post-sanctions Iran. There is no denying that the country of almost 80m people, holder of the world’s third largest reserves of oil and its second largest reserves of mostly untapped gas, has enormous potential. GDP is expected to be $430bn for the current fiscal year (to March 2016) and is certainly capable of more than doubling over the next seven years if sanctions are taken down as per the agreement with the UN, and they stay down.
But Iran is still a state dominated by religious leaders and institutions and this means there are fundamental differences between the way business and investment is carried out compared with practices in OECD countries. The economy is also heavily dominated by entrenched insiders, many of whom have very close political connections, if they are not actually part of the state structure. Of course investors in any developing economy need to be mindful of local conditions and be ready to adapt. This is much more so in Iran; the patient and the prepared will make a great deal of money, while those who rush in with ill-prepared due diligence will quickly falter. Read more
As always, there is a great deal of noise around the Russia story and that makes it difficult for investors to identify the core issues with the greatest impact on risk. There is a lot of concern and speculation over the next steps in eastern Ukraine and the possible consequences for sanctions. Russia is also viewed as being among the most exposed to any deterioration in China’s growth outlook and from the yuan devaluation. On top of which is the daily battering from the sliding oil price.
There can be no argument that Russia is in a very precarious and even dangerous position. The 4.6 per cent preliminary estimate for GDP contraction in Q2 confirms that. But, cutting though the noise and discarding extrapolations and exaggerations, there are two core issues which investors should now be most focused on and which will provide guidance as to whether investment risk is deteriorating or improving. Read more