Financial advisors who have yet to adjust their emerging market portfolios in light of Russia's annexation of Crimea from Ukraine are in good company. The head of emerging market equities for Schroders PLC, which, with $435 billion, is one of the largest asset management companies in the world, is also holding its positions pending further action by Russia's president Vladimir Putin.
With its stock market down 19 percent since the crisis with European Union-leaning factions in Ukraine, the worst economic result so far has hit Russia itself, Schroder's Allan Conway told Financial Advisor following the company's press conference yesterday, which focused on global opportunities and how to prepare for rising interest rates. The latter was well-timed, just as U.S. Treasury Secretary Janet Yellen was delivering news of another $10 billion reduction in monthly asset purchases that have suppressed interest rates.
“We're overweight Russia [3.5 percent] now,” said Conway, who wouldn't speculate as to what the firm will do if fears that Putin may attempt to annex more of the Ukraine, or other adjacent parts of the former Soviet Union, should be realized. For now, Schroders, along with millions of others, is watching what effect penalties and sanctions by the U.S. and allies will have in discouraging Russian advances against Ukraine and other states. Hungary's stock market is off 13 percent.
“We're taking a view that the situation will stabilize, but obviously we don't have perfect foresight,” said Conway. If Putin expands beyond Crimea, he expects to see “a general selloff that will affect not just emerging markets but across the board. Europe and Wall Street would then sell off, too.” He added, “I don't think it's likely, but there is a risk that it could happen. Then there would be a much more full-blown confrontation between Russia and the U.S. But that's not our central case -- if it were, we wouldn't be overweight Russia now.”
Even with the situation restricted to the Crimea section of Ukraine, oil prices last month were down about 4 percent, as commodities in general have been relatively weak over the period. The entire energy sector was off 11 percent. Only two commodities have held up, noted Conway, “nickel, an anomaly, and gold.” As the situation has calmed somewhat, oil price rises have come off highs “somewhat.” He sees the gold price rise as indicative of expectations around inflationary pressures.
Elsewhere, the Fragile Five countries -- Turkey, India, South Africa, Brazil and Indonesia, are “very weak,” Conway said. Emerging markets generally had a 5 percent selloff. In the case of Indonesia, Conway believes, the country's 26 percent rally was “a bit too strong” with “investors having been too excited about its turnaround. That's what happens when confidence returns,” he noted. However, by the end of 2014, Conway expects Indonesia will be over its current “pain,” elections will be completed and, as the Russian situation becomes clearer, “the ground will be set for a much stronger rally.”