In a contrarian view, NN Investment Partners is overweight Russian corporate bonds despite the country’s severe recession.
“Our emerging market corporate debt strategy is overweight Russia by about 5%. Within the broader EM universe, the risk-adjusted compensation for high quality Russian credit, supported by a strong technical driver, remains attractive and warrants a selective overweight,” said Willem Visser, credit analyst at the firm said.
Russian corporates have weathered the storm remarkably well and the strategy is to focus on companies with strong credit profiles, good liquidity and modest domestic exposure, the firm said.
In terms of valuations, the Russian credit universe has tightened to pre-crisis levels as the sector recovers. But there are still attractive opportunities for bond-pickers, particularly in the oil and gas industry and to a lesser extent in high quality metals and mining as well as telecom names, the firm said.
Due to continuing economic sanctions imposed by the European Union and the US, there is still a very limited supply of new bonds. Yet strong demand comes from local investors who are flush with cash and short of investment opportunities.
This technical demand persists given the country is in recession, but over the next 12 months it may dwindle, the firm said.
Signs of economic recovery?
The Russian economy is showing initial signs of recovery after a steep decline in 2015, when it contracted by 3.7%, driven by the collapse in oil prices and a fall in the rouble, Visser said.
The tough situation was exacerbated by the international sanctions imposed by the EU and US for Russia’s role in the Ukrainian conflict.
“To counter the contraction, the government conducted a number of effective macro policy responses to make the economy less dependent on oil prices. The central bank switched to a floating currency regime, letting the rouble depreciate sharply against the US dollar. This also preserved the strength of Russian foreign exchange reserves.
"These reserves, coupled with a low external debt-to-GDP ratio for the sovereign, act as a bulwark against global headwinds,” Visser said.