JPMorgan Russian (JRS) had a tough trading year to 31 October 2020, with its total market return coming in at -17.0%. The benchmark RTS index fared worse, registering a decline of -20.7%. As at 31st October 2020, the discount was 11.2%, unchanged from the previous year-end date. JRS’s total NAV return was -17.5%.
In her review, JRS’s chair, Gill Nott, said: “At the beginning of the period under review there was a relatively positive outlook for the Russian market but this ended abruptly in February. First, there was a disagreement between Russia and other OPEC countries that initiated a steep decline in oil prices. Then, in late February the rapid spread of the Covid-19 pandemic led to a crash in global equity markets. The influence of the pandemic on the economy of Russia has been significant with the unprecedented fall in oil prices and all that implies for an economy which is highly dependent on energy exports. Fortunately, the investment manager had already reduced the exposure of the Company to energy stocks at the end of 2019 and this proved beneficial. Whilst energy companies remain a significant proportion of the portfolio of the Company it is considerably underweight when compared to the benchmark index. The investment manager has also reduced exposure to smaller stocks preferring to invest in predominantly large, well-capitalised companies that can better withstand the prevailing difficult market conditions. Such companies have strong cash flow and a greater ability to continue to pay dividends which are an important contribution to the total return of the Company. In addition, the Company now has a greater exposure than it had in the past to companies that are technology-based, or use technology to enhance their business. More details on these significant movements in the portfolio, and specific investee companies are given in the Investment Manager’s report on page 14 of the Annual Report and Financial Statements.
The Russian government has introduced a number of support mechanisms and the Russian Central Bank reduced interest rates, with further reductions expected. The strength of the Russian health care system and government initiatives to reduce the spread of Covid-19 were relatively effective in avoiding the worst effects of the pandemic suffered by some other countries. The Russian made vaccine, Sputnik V, was one of the first to become available and in due course should have a positive impact on the situation in Russia although the extent and timing of the hoped-for economic recovery is still being gauged. The Russian economy has largely adjusted to the sanctions applied by the US and European Union in 2014. See page 21 of the Annual Report and Financial Statements for reference to the continuation of the sanctions rules under UK law following Brexit on 31st December 2020. The Board carries out regular reviews of the Company’s risk profile during the year and you will see details of what we judge to be the key risks set out on page 23 of the Annual Report and Financial Statements, which now includes the risk of global pandemics. Compliance with the sanctions remains a key risk for the Company and JPMorgan Asset Management’s compliance and investment functions monitors all investments and regularly assures the Board that processes are in place to ensure that the Company remains compliant with the current sanctions regime.”
Outlook for 2021 from managers Oleg I. Biryulyov and Habib Saikaly
Looking ahead, JRS’s managers, Oleg I. Biryulyov and Habib Saikaly, expect to see the following:
- “Firmer oil prices in 2021, after the price shocks of 2020. These will be driven by production cuts and improving compliance with the guidelines, which will be positive for the earnings of Russian companies. As the world emerges from lockdown, transportation should recover and demand for oil products could be supported.
- The Central Bank of Russia likely to pause before considering further interest rate cuts from the current 4.25%, allowing time to consider how successful the cuts have been in stimulating spending and investment. We expect the rouble to recover some of the losses it sustained against the US Dollar and Sterling over the last year, bearing in mind that Russia’s macro situation continues to be one of the best amongst leading global economies.
- After an extremely negative 2020, we expect 2021 and beyond to be positive for both earnings growth and the outlook for dividends.
- The environment around sanctions remaining fluid, and we will continue to monitor the situation. We do not expect any significant progress on diplomatic relations, as it will require a massive shift in stance over events such as the Ukrainian situation, which may not happen until there are leadership changes in the countries involved in this conflict. The state of the Russian economy will dictate how much pressure there is to resolve the current stalemate which clearly impinges on economic ties and trade relationships.
Notwithstanding the challenges that lie ahead, we believe the fundamentals for investing in Russia remain compelling for those investors prepared to take the risk. We remain invested in a number of companies where we expect their dividend track records to remain strong and continue to grow in line with a recovery in earnings. Many of these stocks are well supported by Russian retail investors who, like other retail investors around the world, are seeking new sources of income and are becoming significant holders of high yielding domestic equities. As part of our selection criteria, we will continue endeavouring to add value for shareholders by basing investment decisions on relatively strong and improving fundamentals, which we believe will reassert themselves as the primary drivers of returns over time.”
JRS: JPMorgan Russian beats benchmark in tough period for Russian assets