Update On Ukraine-Russia And Its Impact On The Portfolio

Update On Ukraine-Russia And Its Impact On The Portfolio


The Russian invasion of Ukraine has created shifts in investment portfolios across asset classes globally.

Higher commodity prices tend to coincide with better EM performance.

For investment portfolios more broadly, this may include better diversification across asset classes and markets.

daboost/iStock via Getty Images Summary

As the Ukraine-Russia conflict develops, we have significantly reduced overall Russia exposure and continue to closely monitor the situation.

The Russian invasion of Ukraine has created shifts in investment portfolios across asset classes globally. The VanEck Emerging Markets Equity Strategy was affected as well. As a result of recent sanctions, 1 the overall Russia exposure was reduced significantly, in part by actively reducing our weight and by price action. In line with our peer group, when share prices are halted or stale, we fair value those prices, trying to accurately estimate where they ought to be trading. As of the date of this note, the Russian local market, ADRs and GDRs are all effectively halted. Please note, the situation is fluid and we are closely monitoring it. In this investor note, we aim to provide an update on the Ukraine-Russia situation and its impact on the overall portfolio. VanEck Emerging Markets Equity Portfolio – Russia Exposure Reduced

Russia exposure within the portfolio was 1.00%. 2 It is concentrated in four (4) companies that are domestic demand, local consumer-driven names. We are in a very fluid situation and are constantly reassessing risks associated with the investments. It is reasonable to assume that fair value pricing across our, and our peers’, portfolios has further reduced this weight as the month of March has progressed.

Russian companies (% of strategy) were: Detsky Mir (0.45%)

Yandex NV Class A ( YNDX ) (0.28%)

Sberbank Russia PJSC Sponsored ADR ( OTCPK:SBRCY ) (0.15%)

Fix Price Group Ltd. Sponsored GDR (0.12%)

Russian company value and liquidity impact. Following Russia’s large-scale invasion of Ukraine on February 24, 2022, governments of the United States and many other countries have imposed economic sanctions on certain Russian individuals and Russian corporate and banking entities. Several jurisdictions have also instituted broader sanctions on Russia, including banning some Russian banks from global payments systems that facilitate cross-border payments. In response, the government of Russia has imposed capital controls to restrict movements of capital entering and exiting the country. As a result, the value and liquidity of Russian securities and its currency have experienced significant declines. Each company that we hold has been impacted differently, but all are impacted by the very substantial hit to economic activity in Russia and the significant weakening of the Ruble.

Performance impact. Naturally, Russian equity performance and fair valuation subsequent to trading halts have had an impact on the portfolio. Without explicitly disclosing the current “mark” for the share prices, we believe, it is fair to say that current exposure is now minimal. We think it is likely that some form of sanctions on Russia is likely to persist for years rather than months. Please note, the MSCI indices will only mark the Russian prices at (effectively) zero and exclude Russia on March 9, 2022, eliminating the gap between general fair valuation used by the industry and the index provider.

Emerging Markets (ex-Russia) Exposure – Global Investors’ Diversification Play

Given that 99% of the portfolio was invested outside of Russia, 3 we wanted to provide an update on the overall portfolio impact and positioning, by briefly discussing emerging markets (“EM”) regional/country dependency on Russia and how we think it might trickle down, if at all, to the types of local names that we currently hold.

In general, higher commodity prices tend to coincide with better EM performance, but usually, this comes with better global growth expectations, which is not the case now. Some countries fare better in a higher commodity environment, such as South Africa, Brazil, and Indonesia, whilst net importers such as India can struggle with the cost of energy imports, as an example.

Commodities apart, Russia’s trade linkages with major emerging markets countries are very low. But broader commodity price increases have caused increasing chatter about stagflation – the silver lining is that those fears may cause developed market central banks to be more cautious in rate increases and the largest economy, China is actively easing. Broadly across emerging markets, having already hiked rates in many places, and with less of an inflation issue than the U.S., real rate differentials are very high. Basic balances, current account, and foreign direct investment are at 15-year highs.

Markets are cheap, with relative price/book […]

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