News Column

Baring Emerging Markets Underperforms On Ukraine Crisis

May 15, 2014

Samuel Agini

LONDON (Alliance News) - Baring Emerging Europe PLC Thursday reported a fall in its net asset value per share on a total return basis during the first-half of the year, an underperformance against its benchmark in the wake of the crisis in Ukraine.

In a statement, Baring Emerging Europe, whose three biggest holdings at the end of the period were in Russian companies Lukoil Holdings, Sberbank and Gazprom, said its NAV per share fell by 13.3% on a total return basis during the six months ended March 31. In the same period, its benchmark, the MSCI EM Europe 10/40 Index, fell by 10.3%.

Baring Emerging Europe was exposed to the political upheaval in the Ukraine, where a referendum in Crimea put the region under Russian control after President Victor Yanukovich was ousted. Russian President Vladimir Putin's influence on the referendum was met with international sanctions, spearheaded by the US and the EU. The sanctions increased market uncertainty, which led to Russian investors selling off the rouble in order to limit their risk. The Russian Central Bank reacted by raising short-term interest rates as it sought to counter the downward pressure of the sell-off.

"More importantly, a sharp rise in capital flight tightened liquidity further and stifled banks' lending appetite, essentially killing the chances of an economic recovery," Matthias Siller of Baring Asset Management Ltd, the company's investment manager, said in his report.

Chairman Steven Bates said the underperformance took place "entirely" in the aftermath of the Ukrainian crisis.

"The portfolio was positioned to benefit from the likelihood of a better economic environment in Russia during 2014 and the political events which dominated markets during February and March were not foreseen," Bates said in a statement.

"When markets react to geopolitical crises, there is often a random element in the impact on individual securities. It is only some time after the events that calmer analysis can allow the stock picking approach pursued by your manager to reassert itself," Bates added.

The Chairman said that it seems "inappropriate" to say that the return is disappointing.

"In the board's view the returns of the last six months tell us nothing about the investment approach and everything about the dynamics of a market crisis. We remain confident in our manager and expect that his approach will be successful as markets recover from the cardiac arrest they suffered in February," Bates said.

Baring Emerging Europe's investment objective is to achieve long-term capital growth, principally through investment in securities listed on or traded on an Emerging European securities market or in securities of companies listed or traded elsewhere, whose revenues and/or profits are, or are expected to be, derived from activities in Emerging Europe.

Siller admitted recent performance has been disappointing.

"While recent performance has been disappointing due to being underweight relative to the index in Poland and Greece, both of which outperformed the benchmark in the period in question, it is worthwhile mentioning that the adverse geopolitical developments in Russia overshadow the otherwise positive developments in terms of stock picking and asset allocation," Siller said in his report.

"We remain confident that our management approach of identifying aptly priced growth opportunities can work in an environment where a large part of the emerging European market trades at multi-year lows relative to developed markets. Recent evidence of increased fund flows into the region, in spite of the politically induced volatility, makes us positive that the attractive combination of cheap valuation and solid growth prospects will continue to attract attention and prove rewarding for investors over the longer term," Siller said.

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Source: Alliance News

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