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Trump and Putin 2017: A Hedge Fund Investor's View From Moscow

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Barring oil going back to the $30s, Russia isn’t look so bad in 2017.  From a sentiment perspective, the election of a pro-Russia Donald Trump over an anti-Russia Hillary Clinton is good for Washington-Moscow relations. It also serves as yet another trend indicator as Western powers move to the center-right, with much of the blame to be placed on failed Middle East policies and non-stop wars that have led to a European Union-busting migrant crisis.

This weekend, Matteo Renzi is likely to be handed his hat in Italy. A referendum to change the way laws are passed is unpopular in much of the country and if that vote loses, Renzi swore he’d pull a David Cameron, who stepped down when the U.K. voted to vacate the European Union. Renzi is now being pressured to stick around because the alternative is the secessionist Northern League, the Five Star Movement of former comedian Beppe Grillo, and the Forza Italia of former Prime Minister Silvio Berlusconi, both friendly towards Russia.

This coming spring, France will elect a leader who is also open to Russia.

Sunday’s runoff to choose a candidate to face Marine Le Pen of the National Front picked Francois Fillon in a landslide. Fillon is a social conservative Christian, no fan of opening the doors to a single jihadi, and wants to end sanctions on Russia. Of course the anti-Russia Financial Times hates this idea.

The tide is turning. The anti-Russia bias is slowly melting away, unless oil tanks or Russian tanks roll into the Baltics, as Hillary Clinton once predicted — wrongly. If sentiment improves and Russia and Ukraine continue to be open to dialogue regarding insurgents in Donbass and elsewhere, sectoral sanctions on Russia are more likely to be lifted in July, assuming Renzi goes and either Le Pen or Fillon lead France.

While the number of “ifs” about Russian sanctions removal is getting smaller, it is best for investors to buy Russia when oil has collapsed, rather than to buy Russia when oil is collapsing, which may happen soon if the OPEC deal fails again as expected.

Russia’s economy has been in recession for the last two years thanks to weak oil prices. It has been remarkably resilient despite that, plus a massive anti-Russia bias in the markets and in Western politics. (Photographer: Andrey Rudakov/Bloomberg)

View from the Hedge

Last December, FORBES profiled American portfolio manager David Herne, founder of the Specialized Research and Investment Group hedge fund in Moscow. He said back then, “I know the Russian market will be worth much more than it is today.” Since that article ran, the Market Vectors Russia (RSX) exchange traded fund rose 23.7% compared to a 7.4% gain in the MSCI Emerging Markets Index and a 6.7% gain in the S&P 500. Within the big four emerging markets, only Brazil has done better, thanks to the meteoric rise of Petrobras shares. Investors who chose the small to mid-cap Russia ETF (RSXJ) realized a gain of 77%.

Here is what some of Herne’s fund managers and analysts think the Trump/Putin 2017 ticket brings to Russian investors. It’s more sober than one might think.

I hope Trump will be pragmatic. In other words, he will defend U.S. national interest, but he will not participate in weird geopolitical games. Trump was not supported by the Middle Eastern monarchies and owes nothing to them. I am sure that Clinton was supported. Generally speaking, I would think that geopolitical tension with Russia will ease. With regards to sanctions, I do not see any reason why Trump would lift them, because he, as a pragmatic person, will have to ask something from Russia in exchange. I have no idea what he might ask. I also think Trump will support the American oil and gas industry. Taking into account this and a possible decrease of military tension in the Middle East, I think we should not expect any significant oil price growth until the world economy starts growing much faster or production starts declining.” — Alexei Klaptsov, Portfolio Manager

Sanction removal is not a unanimous opinion inside of Herne’s hedge fund offices, which span from Tokyo to London. Some of Russia’s biggest businesses won’t mind. Agribusiness, for example, has benefited from bans on European produce. Moreover, a Trump win is part of an anti-establishment trend that could ultimately unwind the European Union: bad for Russia.

I hope that initially the Russian executives will try to establish friendly relationships with the new president, and we might expect some improvement in rhetoric from both sides. If no abrupt movements compromise a fragile improvement, the strategic investors will slowly increase their presence in Russia.” — Ilya Brodsky, Head of Private Equity.

No one expects there to be a continued rally in Russian stocks. RSX rose over 3% since Trump won, while the MSCI Emerging Markets Index fell 5.5%. Russia has even outperformed the S&P 500 since Nov. 9. Herne’s team is not wholly convinced that sanctions are removed in Trump’s first year. U.S. sanctions expire next December.

If Trump sees some benefits from lifting sanctions, he will do it. But the first round of sanctions against individuals should be removed in March 2017 and Trump can lift them without congressional approval. These sanctions are not as critical as the macro ones, so my bet is Trump gives this as a gift to (sanctioned) Russian politicians. The second point is oil. If limits to access oil and gas extraction on federal territories and continental shelf of the U.S. are lowered, significant reserves will become profitable. So the question of oil price pressure can be more important for the Russian economy in the long-term, rather than sanctions. To predict where commodity prices will be is even more difficult to assess than Trump’s political behavior.” –Lidia Mikhailova, Senior Analyst, Trader

Source: Forbes
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