GlobalCapital was initially surprised to hear that a Rusal bondholder increased his exposure to Sberbanklast week.
Surely investors should be running scared of Russia right now? Rusal bondholders, in particular, might be expected to panic dump Russian debt for fear of more sanctions.
But this is not the way emerging market investing works. In this market, investors are paid to roll with the punches.
Sure, that Rusal bondholder is not having the best of months, but they are right to continue to seek out the opportunities that volatility has created, assess the market impartially and the risk of further sanctions on each individual company and bank, and invest their clients’ money based on that impartial view.
Sitting around licking sanctions-inflicted wounds does no one any good, and certainly not a portfolio manager’s year-end portfolio performance numbers.
It seems unlikely that the whole Russian bond universe will be sanctioned by the US. It makes up too large a part of indices and thus western investors’ portfolios for such a move to be anything other than catastrophic — not just for Russia but for almost every emerging markets fund in the US.
And if not followed by Europe and Asia, it would also make those funds supremely non-competitive. US authorities seem to be standing by that assessment.
If you accept that the likelihood of further sanctions forcing you to dump all Russian debt is low, though further sanctions may be rolled out on individual companies, there is a buying opportunity in the blown-out spreads of some Russian banks and corporates.
The big question is which ones? Some analysts, such as those at Exotix, have already produced lists of Russian entities so far unconnected to any threat of sanctions. Others, like the Rusal bondholder, are looking at the bluest of the blue chips, with so much debt already outstanding to the West that a similar set of sanctions to those imposed on Rusal would assure mutual destruction.
After the sanctions on Russia in 2014 from the EU and US, the whole of the Russian debt universe sold off similarly to this month. But the debt of non-sanctioned entities crept tighter in the following years as buyers found themselves wanting to retain exposure to Russia but in a world where limited Russian paper was available.
The same could well happen again.
We are reminded time and time again as political events explode financial markets in developing countries that emerging market investors are paid to take high risks in the hope of high rewards.
Those EM investors that shake off the dust and debris of Rusal fast enough to continue to do their jobs properly are the ones we’d give our money to.