GMO is overweight in ‘extremely cheap’ Russian equities as it believes US sanctions will not have a major impact on Russia’s economy.
In a research note GMO head of emerging market equities Arjun Divecha said the asset manager is ‘quite comfortable’ with its overweight in Russian equities, and believes a ‘major blowup’ from tougher sanctions is unlikely.
Divecha said the firm’s Washington sources told it the new measures, and their timing, were a ‘complete surprise to everyone in Congress and that this was purely a White House operation… our sources in Moscow suggest a similar view.’
He added: ‘If the intent was to hurt Russia economically, sanctioning companies such as Gazprom and Sberbank would have had a much more profound impact.’
Divecha said the new risk is that the White House is now ‘actively involved with day-to-day Russian policy’ and ‘everyone is uncertain as to what Mr. Trump might tweet tomorrow.’
Gazprom fell 8% last week while Sberbank – Russia’s largest bank with 20,000 branches and 65% of the country’s deposits – fell almost 22%.
Divecha added that as the supplier of 30% of Europe’s natural gas, Gazprom is unlikely to be sanctioned or suffer significant negative effects.
He put the significant tumble in Sberbank’s share price down to the fact that it’s the most foreign owned and most liquid Russian stock and was ‘hard hit for liquidity, rather than for fundamental reasons.’
Divecha added that only 3% of Sberbank’s assets were exposed to sanctioned companies.
Sberbank is one of the largest positions in GMO’s emerging markets portfolio and according to Divecha trades at 5 times current earnings and 1.3 times book value while ‘earning 23% return on equity.’