06.20.2014
By Terry Flanagan

Templeton Profits from Ukrainian Bonds

Michael Hasenstab, portfolio manager of Templeton Global Bond fund, said the firm had made money on its investments in Ukraine despite the turmoil with Russia.

Hasenstab said at a Morningstar conference: “If we look back on the course of our holdings, we’ve made a good amount of money through our investments in Ukraine.”

He added that at their low point Ukrainian bonds were trading in the mid-80s and have recovered to trade close to par in many cases.

“It’s a volatile market; it ebbs and flows on a day-by-day basis,” added Hasenstab. “But I think we’ve seen a lot of the naysayers, a lot of the short-sellers out there, have realised that was a mistake, and we’ve seen a pretty good recovery in the bonds.”

The fund manager said Templeton had been interested in Ukraine for many years and the firm had cherry-picked moments when there was panic-selling and spikes in yields to accumulate a position.

Hasenstab said Ukraine was attractive because it has a low ratio of 40% debt to GDP and Templeton has bought dollar-denominated government bonds to avoid foreign exchange risks. In addition, over the next couple of years Ukraine will access over $30bn of international assistance from the International Monetary Fund and other foreign aid.

“So with solvency intact, with liquidity intact, what we liked was that everyone was just looking at some of the noisy headlines and not going to the country and understanding the underlying fundamentals, and we think long-term it’s a good investment opportunity,” he said.

Hasenstab added that the newly elected president, Poroshenko, has a very strong mandate and is working towards Ukraine becoming a buffer state between NATO and Putin. “So, we’re quite excited today,” Hasenstab added.

Ulle Adamson, interim Emerging Europe strategy manager at T Rowe Price, said that the recent elections in Ukraine would lead to a de-escalation of the crisis as Poroshenko is willing to engage in direct and unmediated negotiations with Russia,

She added: “However, I think we are not out of the woods yet. I think the situation remains fluid and it is most likely going to drag on for a while.”

At the beginning of the crisis in March, the Russian stock market fell more than 20% but began to recover in May.

Adamson said that in March and April the market was expecting more severe sanctions and the possible Russian invasion of eastern Ukraine. However Western sanctions proved to be relatively mild without directly affecting any listed Russian companies and Russia has claimed to respect the results of the elections in Ukraine which has boosted the stock market.

“So if the situation in Ukraine indeed stabilises I think the recovery of the Russian market is likely to continue given that the valuations there are still very attractive,” said Adamson.

Adamson said during the crisis she maintained, or even increased, positions in well-run and well-managed domestically oriented Russian companies as she believed that a compromise solution would be reached.

“I still favour the companies with no risk of sanctions, for example domestically oriented companies in sectors such as internet and consumer staples, and I very slightly trimmed positions in companies that could possibly have been affected by the sanctions within the energy sector, but I think overall this focus on well run, high quality companies has positioned us well for this de-escalation of the crisis,” she said.

Adamson cited Russian internet companies such as Yandex and Mail.Ru who will be unaffected by sanctions but are also relatively defensive to the economic slowdown in Russia.

“I also like structurally growing companies that provide basic services such as food retail which again will not be affected by sanctions and will be resilient in the scenario of an economic recession or very low growth,” she added. “In case we do get any kind of an economic recovery then I think Sberbank, Russia’s largest bank which is very well managed and it’s trading at below one times price to book, will be the key beneficiary.”

Adamson has cut this year’s outlook for Russian GDP by more than 1% due to the large capital outflows and the reluctance to invest from local and foreign investors.

In the first quarter of this year capital outflows from Russian were $64bn. This was the largest since the fourth quarter of 2008 and more than the $63bn for the whole of last year according to T Rowe Price.

Adamson pointed out that the outflow in the first quarter included $20bn of foreign exchange exposures by corporates and a $13bn increase in foreign exchange positions by the banks, so some of the capital could start to flow back as the rouble has recently appreciated.

Adamson said the key risk for Eastern Europe is the re-escalation of the Russian/Ukraine crisis but also an upward reversal in 10-year US Government bond yield which would most impact the Turkish market.

“I think the key reason to invest in emerging European equities now is that this region still provides a number of attractively valued, yet fast growing companies, and I think overall the valuations are at a discount to most of the other emerging countries with the exception of Poland while the structured growth stories are often very similar here,” added Adamson. “And I believe now is a good time to pick up some of those investment opportunities and to build an exposure to the region as I think over time, provided that the geopolitical situation stabilizes, these valuations will rerate.”

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