Russian equities have witnessed heightened volatility in recent times, shedding 20 percent and then recouping losses to trade 20 percent higher than recent lows. Even after three rounds of sanctions, the Russian market has been surprisingly resilient, said Stephen Isaacs, Chairman of Investment Committee at Alvine Capital Ltd, London.
Also, the time to generally buy in emerging markets is when there’s “blood on the streets,” so to speak. If an investor entered an emerging market during a crisis, they would have realized that it was a very good entry point. Russia is a very big country and valuations are very cheap, though they were cheap even before the crisis in equity markets erupted.
Selectively, mobile telephone companies such as MTS have good, sound businesses and they are making money. They are paying dividends and they should not be completely ignored. This is a political crisis and should be solved politically.
German Chancellor Angela Merkel should listen to history and should remind herself what people like Bismarck said: “You should not fight wars in two fronts.” The West is fighting one war in the Middle East and another one in Russia now. The reality is Russia has genuine interests – ethnic, historic and economic, in the eastern part of Ukraine and some sort of combination needs to take place, he said.
Asked to explain his investment holding period in Russia, Stephen said any emerging market is a long-term bet and Alvine is looking at an investment horizon of 2-to-5 years.
Unfortunately, it is unlikely there would be an immediate solution to the current impasse. However, if investors buy securities when they are very cheap and are patient, particularly in a global rising market for assets when credit conditions are incredibly easy, Russia should be part of that investment story, he noted.
Oil prices have dropped 10 percent from the highs hit in June. Asked if that signals something fundamental for growth, Stephen said analysis showed oil prices dropped due to lack of global demand, particularly in Europe and China. Other commodity prices and bond yields indicate global growth is in trouble. There have been some serious fallbacks in demand and it’s a big concern, he observed.
Consensus forecasts call for a US growth of 3 percent next year. Asked if that’s wrong and whether that would mean the Fed stays on hold, Stephen said it’s a very bold forecast. The US is more than 60 months into an economic expansion and historically 60 months have been the average length of every economic expansion since the World War II.
The Federal Reserve chief has been very cautious about it and muted in her reactions. With the global picture rolling over, the US will find it difficult to carry growth at that level, he argued.
Asked if Janet Yellen is expected to address those concerns at the central banker’s symposium in Jackson Hole Friday, Stepehn said the Fed has always been more focused on international matters than some of the individual precedence. It is also likely European Central Bank President Mario Draghi would caution her that an abrupt change in US monetary policies would be disastrous for Europe.
Asked if a weaker Euro would be great for the struggling euro-zone, Stephen said the euro has been a conundrum. The euro has been surprisingly stable despite Draghi talking about a weaker currency for a long, long time. Despite falling over the last few weeks, the euro is effectively unchanged on the year. The problem is that Europe has a structural trade surplus while the US has a structural trade deficit. So, there is a natural inflow of funds all the time irrespective of the crises, the politics, the bond yields etc. Hence a weaker currency is not the solution though a 10-15 percent lower euro would have given Draghi a lot of relief, he noted.
Asked if Draghi is a politician, and if he would like to deliver a message to France at the central banker’s meet in Jackson Hole, Stephen said every central banker today needs to understand politics and Draghi is no exception. Mario Draghi, along with the Germans, is concerned about what’s happening in France. France is the big black hole in Europe.
The last crisis in the currency-area involved the so-called peripheral nations such as Portugal, Ireland, Italy, Greece and Spain. However, those countries have done pretty well after a decade of membership in the European Union. When it came to reforms, they slowly prepared themselves to achieve something.
France, however, is in a different category. French President Francois Hollande put up the pension-age back up again after he won the elections, one of the a very painful reforms that former president Nicholas Sarkozy took a lot of stick for.
Theoretically, Hollande remains a reformist president, but in reality, nothing has happened so far and is not likely to happen either. Paris is looking for the Germans to ride to the rescue, and to some sort of ultimate monetary solution to the problem and the Germans are very fearful.
The Presidential election in France is due to be held in 2017 and the National Front is ahead in the polls. A lot of people in Europe are concerned about France and politics is driving the monetary policy. Traditionally, the ECB might be behind the curve and reluctant to act, but act they will, he concluded.
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