Nomura says most big investors are staying on the sidelines in Russia and Ukraine
The February 18th edition of Nomura’s Global Markets Research focuses on current opinions of professional investors, “both real money and fast money investors”, regarding potential investments in either Russia or Ukraine.
Nomura analyst Dmitri Petrov spent a week in New York chatting with financial market professionals and provides an overview of the discussions: “Overall, there seems to be low conviction on both Russia- and Ukraine-related trades owing to uncertainty around oil and geopolitics. In Russia investors seem to prefer the short-end and tier-one quasi sovereigns. Involvement in currency and local markets is lower owing to liquidity issues. In Ukraine, the consensus view seemed to be that bond re-profiling was likely, but with considerable divergence as to exit yield assumptions, which translated into low involvement in the restructuring story.”
Oil and geopolitics are obvious concerns for investors in Russia
Petrov highlighted that investors seemed to agree that oil price dynamics are currently the main factor in the valuation of Russian assets, and then geopolitics and international sanctions. Surprisingly, only a few of those he spoke to had a strong view on oil price developments and those who did were more focused on downside risks.
He also pointed out that while investors in Russia paid much more attention to politics and sanctions, they are in reality no more predictable than oil prices. Finally, Petrov noted investors seemed to have relatively low levels of conviction about Russia-related trades in general.
Uncertainty trumps in Ukraine
According to Petrov, the talks about Ukraine were mainly about domestic politics and potential restructuring, “with much less interest in the underlying macro fundamental dynamics, which is not surprising given the unusual level of uncertainty in the outlook.” He did note that clients were generally in agreement with Nomura’s base case view of re-profiling and coupon reduction of Ukrainian debt in a more “investor friendly” restructuring process.
However, there was very little conviction around the possible exit yields because of the obvious risks of the ongoing military conflict, “which translated into low appetite to get involved in the trade by the majority of clients”.
Moreover, very few clients found Ukraine assets attractive at current valuations, “assuming post-restructuring yield compression to the low 10s given strong ongoing support from the IMF as well as the global search for yield.” Some investors mentioned trying to buy Ukraine debt at cheaper levels, maybe the mid-40s, looking at exit yields of at least 14%.
Petrov also highlighted that the medium-term credit outlook was negative with most he spoke to agreeing on the likelihood of multiple restructurings. He also pointed out that domestic political stability was a major worry as many spoke of internal tensions between the President and Prime Minister.
Moreover, only a few investors expressed confidence in the government’s ability to implement the structural reforms required for the current aid package, and the rest were very worried about the EU/IMF’s continuing support in the future. Risks related to this scenario were cited as reasons for expecting higher exit yields.