15.11.2012

Elchin Jafarov

 

Portfolio Manager

Citadele Asset Management

A commodity powerhouse with one of the largest domestic markets on the planet, vast mineral wealth and strong economic fundamentals, Russia and the CIS (Commonwealth of Independent States) is an investment region that is impossible to ignore. Investing in equity securities and equity-related securities in or exposed to growth in Russia, Ukraine and Central Asia, the WIOF Russia and CIS Performance Fund offers investors access to the region’s enormous potential.

 

MOMENTUM FOR THE FUTURE

Favourable developments on commodity markets and abundant liquidity have combined to give markets in Russia and the CIS strong momentum for the future. The region’s main drivers – Russia, Kazakhstan and Ukraine - are now in stable macro shape and local markets offer investors exceptional value:

 

  • In Russia, for instance, the equity market is, based on conventional valuation methods, one of the cheapest of all emerging markets.
  • In the Ukraine, stock market growth has been among the highest in the world over the past decade.

 

The region is also a net exporter of energy resources, one of the largest exporters of agricultural products in the world and is in better fiscal shape than many developed countries – regional states’ public debt burdens (as a percentage of GDP) are below the EU average. Meanwhile, cash flows from commodity exports continue to fuel internal growth and demand, providing strong growth and investment potential for consumer-oriented sectors.

 

ENERGY AND MORE

Among the region’s biggest investment stories is its energy sector. Russia and the CIS is a global energy giant. Russia is the world’s biggest oil producer and has the largest proven reserves of natural gas in the world. It also has the second largest reserves of coal on the planet. Kazakhstan also has some of the world’s largest proven reserves of natural gas, oil and coal. Hydrocarbons are one of the key drivers of the region’s growth in domestic demand, infrastructure development, financial independence and stability and the energy sector presents some of the region’s best investment opportunities.

 

 

But regional opportunities are not all just about oil, gas and coal and it holds vast wealth in other commodities:

 

  • Kazakhstan holds more than 90% of the elements from the periodic table and is the world’s number one producer of uranium – an element for which demand is expected to rise rapidly as countries like China expand their nuclear power capacities.
  • The region is among the world’s leading producers and exporters of diamonds, iron ore, steel, nickel, platinum, chromium, zinc, lead and many other hard commodities which are all seeing growing demand globally.
  • The Tien Shan gold belt in Central Asia is the second largest gold belt in the world.

 

USING ITS ADVANTAGE

The Fund’s investment strategy allows it to take maximum advantage of the opportunities on offer in the region. The Fund’s portfolio manager uses a top-down asset allocation system based on the outlooks for both individual sectors and countries. The manager also carries out bottom-up identification of individual investment cases and employs a combination of in-house research, meetings with senior managers at individual companies as well as local brokers, and third-party research when picking stocks. This allows the Fund to target companies with significant underlying growth potential, strong and improving fundamentals, good management and attractive valuations.

 

EMERGING MARKET VALUE

The region also offers inherent emerging market investment value. Economically, CIS countries still lag far behind their European peers, implying plenty of space for further growth. Other fundamentals in the region underline its attractiveness for investors. Projected economic growth rates outstrip those of the developed world while the political environment – a significant risk factor for investors in the past - is becoming more stable. As the region develops, investment will also be needed and events such as the 2014 Winter Olympics and the 2018 World Cup, both in Russia, will give a further boost to infrastructure investments. Massive infrastructure spending is also forecast around the region as countries continue to develop and modernise. Russia’s recent accession to the World Trade Organisation (WTO) is expected to help boost its Russia’s economy by tens of billions of USD each year in the medium-term and improve the business environment by forcing legislative and regulatory changes that will make foreign investment easier.

 

OUTLOOK

Of all the countries in the region, Russia currently has the brightest prospects. Its accession to the WTO is expected to bring benefits, although this is more likely to be in the medium-term than immediately. As in all major export markets, industrial production has slowed in Russia in a difficult external demand environment. This means the portfolio manager’s attention has turned to companies which are driven by internal consumption and demand. The outlook for Central Asia depends very much on the base metals market. While this has not been performing strongly recently a firm turnaround in the situation would significantly improve Central Asia’s prospects.

 

INVESTMENT ADVISOR

The Fund’s investment advisor is one of the largest asset managers in the Baltic region, Citadele Asset Management (Citadele AM). Citadele AM is the asset management arm of Latvia’s Citadele banka, one of the leading financial groups in the Baltic States. Citadele AM is the largest investment company in the Baltic region and via its subsidiaries also operates in Lithuania, Russia and the Ukraine.

 

IMPORTANT NOTE: This report has been prepared for information only, and it does not represent an offer to purchase or subscribe to shares. World Investment Opportunities Funds (“WIOF”) is registered on the official list of collective investment undertakings pursuant to part I of the Luxembourg law of 17 December 2010 on collective investment undertakings as an open-ended investment company. WIOF believes that the information is correct at the date of production while obtained from carefully selected sources considered to be reliable. No warranty or representation is given to this effect and no liability can be assumed for the correctness or accuracy of the given information which may be subject to change at any time, without notice. Past performance provides neither a guarantee, nor an indication of future performance. Value of the shares and return they generate can fall as well as rise. Currency fluctuations, either up or down, may also affect value of the investment. Due to continuing market volatility and exchange rate fluctuations, the performance may be subject to significant changes over a short-term period. Investors should be aware that shares in the financial instruments entail investment risks, including the possible loss of the invested capital. Performance is usually calculated on the basis of the relevant NAV unless stated otherwise. Performance shown does not take account of any fees and costs associated with subscribing or redeeming shares. It is assumed that all dividends were reinvested. WIOF prospectus is available and may be obtained through www.1cornhill.com. Before investing in any WIOF Sub-fund(s) investors should contact their financial adviser / legal adviser / tax adviser and refer to all relevant documents relating to the WIOF and its particular Sub-fund(s), such as the latest annual report and prospectus that specify the particular risks associated with the Sub-fund, together with any specific restrictions applying, and the basis of dealing. In the event investors choose not to seek advice from a financial adviser / legal adviser / tax adviser, they should consider whether the WIOF is a suitable investment for them.