The Putin Stock Trade: Buy When Dovish and Brace for ChopHalia Pavliva and Natasha Doff
Forget about fundamental equity analysis and geopolitical calculations when investing in Russian stocks. For the brave of heart, there’s a simpler way to make money in one of the world’s most volatile markets: Buy when President Vladimir Putin says he supports a resolution to the Ukraine conflict.
Never mind that evidence on the ground has often suggested that Russia was doing the opposite, as fighting escalated across the border. Since March, the Market Vectors Russia ETF, the largest U.S. exchange-traded fund tracking the nation’s companies, has posted one-day rallies of 2.4 percent or more on at least eight occasions following conciliatory signals from Putin’s administration.
For speculators, “it’s not so much about what impact Putin words and promises have on the actual situation in Ukraine,” Ian Hague, founding partner at Firebird Management LLC, which oversees about $1.1 billion including Russian stocks, said yesterday by phone from Tbilisi, Georgia. “It’s all about what impact on the market sentiment those words have.”
In other words, investors who didn’t worry about whether the comments signaled a real intention to end the fighting and just bought shares in the immediate aftermath profited. The Russia ETF, while the second-most volatile among 237 U.S.-based funds tracked by Bloomberg, has climbed 17 percent since beginning to rebound from a bear market in March, compared with an 11 percent gain for the MSCI EM Eastern Europe Index.
The ETF rallied 6.1 percent Sept. 3 as Putin, who denies involvement in the conflict, outlined a peace plan for the separatist rebellion in eastern Ukraine after agreeing to move toward a cease-fire with his counterpart in Kiev, Petro Poroshenko. The agreement eased concern that the U.S. and European Union will take further steps to harm Russia’s $2 trillion economy after they had stepped up sanctions in July.
The Micex Index added 1.1 percent to 1,473.45 while the Market Vectors ETF rose 2.1 percent to $25.18 at 10:40 a.m. in New York after Ukraine agreed on a cease-fire with pro-Russian separatists. The Bloomberg Russia-US Equity Index advanced 2.6 percent.
The exchange-traded fund jumped 4.8 percent March 31 after Putin told Chancellor Angela Merkel that he’d ordered a partial troop withdrawal from the Ukrainian border. That rally faded as tension between pro-Russia protesters and Ukraine’s military escalated in the following weeks. It added 2.6 percent June 18 after the political leaders of the two countries discussed a possible cease-fire before reversing gains in July as violence continued.
The average one-day advance for the ETF during those eight Putin-inspired rallies was about 4.4 percent. The biggest one-day gain for the Standard & Poor’s 500 Index, the benchmark gauge for U.S. equities, was 1.5 percent during that six-month period.
Russia’s Micex Index entered a bear market on March 14 during the Crimea crisis before rising more than 20 percent to reach a bull market in June. The gauge plunged in July when the downing of Malaysia Airlines flight 17 galvanized sentiment against Russia and prompted sanctions from the U.S and the EU.
“Volatility is substantial and thus provides ample scope for short-term profits,” Gary Greenberg, a London-based emerging-markets money manager who helps oversee 26.9 billion pounds ($45 billion) at Hermes Fund Managers Ltd., said by e-mail yesterday. “I doubt many large real-money investors are placing long-term bets on the Russian market here.”
Futures on the dollar-denominated RTS index expiring this month decreased 1.1 percent to 123,000 in U.S. hours yesterday. The gauge, the world’s fifth worst-performing primary equity index this year, is down 14 percent in 2014.
While Russian stocks are cheap, the situation is still unpredictable for investors, said Timothy Ghriskey of Solaris Asset Management LLC.
“It’s much too early for us to step in,” Ghriskey, who helps to oversee $1.5 billion as chief investment officer for the Bedford Hills, New York-based firm, said by phone yesterday. “Putin has demonstrated a number of times that his word is not to be believed.”
Russia’s benchmark Micex trades at 5.1 times the estimated earnings of its member companies for the next 12 months, the cheapest among 21 emerging markets tracked by Bloomberg.
“Investors should look at the things they are actually investing in, which are the companies they are buying shares in,” Mattias Westman, chief executive officer of London-based Prosperity Capital Management Ltd., which manages about $3.5 billion, including Russian equities, said by phone yesterday. “Governments all over the world say things which are not true and the Russian government does that too. But we are not buying shares in Vladimir Putin, we are buying shares in companies.”
Putin told reporters in Mongolia Sept. 3 that he has a seven-point plan that will be discussed today at a meeting between representatives of Ukraine, the rebels, Russia and the Organization for Security and Cooperation in Minsk, the capital of Belarus. The plan calls for both sides to pull back, urges prisoner swaps and humanitarian corridors and seeks a stop to the use of warplanes in settlements.
Poroshenko said in a statement that he is hopeful that the peace process will begin at the Minsk negotiations. Ukraine is seeking to end “constant violations of agreements, shooting of captured people and civilians, the destruction of schools and infrastructure,” he said.
“The situation is confusing,” Paul Zemsky, the New York-based head of multi-asset strategies at Voya Investment Management LLC, which oversees $213 billion, said by e-mail yesterday. “It’s very hard to generate an information advantage where the outcome is based on politics and not economic fundamentals.”