Bulls Sharpen Knives as Russia Panic Dishes Up Bargains

(Bloomberg) -- If the turmoil in Russian markets this week has echoes of 2014, investors could be in for a big buying opportunity.

Traders who braved the selloff that ensued after the U.S. and European Union first imposed sanctions on Russia in 2014 were rewarded with some of the biggest returns in emerging markets a year later as stocks and bonds rebounded. Investors at Ashmore Group Plc and East Capital say this time won’t be different.

Bulls Sharpen Knives as Russia Panic Dishes Up Bargains

“I’m already sharpening my knives ready to get into the steak,” said Jan Dehn, London-based head of research at Ashmore Group Plc, which oversees about $70 billion of developing-nation assets. “We’re moving into an area where people are overpricing the risks.”

It’s a risky game to play given the depth of the losses this week and the uncertainty that the latest U.S. penalties and the escalation of tensions over Syria have created in the country’s markets. The latest sanctions specifically bar any trading in the securities of targeted companies rather than just blocking access to new international funding as was the case four years ago

Dehn, who was one of the first investors to turn bullish on Russian assets in 2014, says he’s waiting for the “panic selling” to continue a bit longer before he starts buying. When that happens, he’ll be focusing his attention on corporate bonds and the ruble.

Tactical Purchases

Investors at Jupiter Asset Management and East Capital say they are holding onto Russian equities and looking for opportunities to add. Peter Schottmueller, the head of asset allocation at Deka Investment GmbH in Frankfurt, hasn’t sold or bought Russian bonds this week, but says it may be worth making tactical purchases.

The investors argue that Russia is in a much better position now than in 2014 because oil prices are now rising rather than falling and the first round of sanctions forced the nation to cut back debt levels.

The country’s fundamentals are strong and Russian markets could show signs of recovery at the end of the week if there’s no escalation by the U.S., said Sebastien Barbe, the Paris-based head of emerging-market research and strategy at Credit Agricole CIB who’s the most accurate ruble predictor since the second quarter of 2017.

And government officials have made it clear they’re ready to step in. Central Bank Governor Elvira Nabiullina, who won praise for her handling of the previous sanctions upset, said on Tuesday the lender won’t hesitate to buy dollars or raise interest rates to halt the ruble’s decline if necessary.

“The smart investors typically make large returns by buying Russia when others are panicking,” said Jacob Grapengiesser, a Moscow-based partner at East Capital. “Most of the investors selling now are simply dumping stocks at whatever price.”

©2018 Bloomberg L.P.