Note the last paragraphs... -Vi
LONDON, May 19 (Reuters) - Bearish British investors prefer
to take their lead from Russia's economic problems rather than
recent signs of political progress, investment strategists said
on Tuesday.
''The political situation has improved in Russia,'' said
Oliver Fratzscher, chief economist, emerging markets at ABN AMRO
Bank.
''But it has $32 billion of short term debt compared to forex
reserves of less than $16 billion including gold and $11.5
billion excluding gold,'' he added.
''That's a 200 percent ratio of short-term debt over
reserves. That ratio was 50 percent a year ago,'' he said.
Investors were largely unmoved by the Russian central bank's
decision to hike its key refinancing rate to 50 percent from 30
percent overnight.
Their lack of enthusiasm extended beyond economic data to
fears that Russia would come under renewed pressure if fresh
market contagion breaks loose from Southeast Asia.
''Russia is very volatile and the whole sentiment towards the
emerging markets is very fragile,'' said Radhika Atmerja,
director of Aberdeen Asset Management, which has one billion
pounds ($1.6 billion) in emerging markets.
''Anything that happens in Southeast Asia immediately hits
Russia and Brazil, the other two biggest (emerging) markets,''
she added.
High deficits made Russia, along with Brazil, vulnerable to
contagion risk, according to Shaun Roache, emerging markets
strategist at ING Barings.
''We've had a positive view on Russia for a while but the
current account deficit is rising rapidly,'' he said.
''It's a liquidity driven problem. We need to see Russia
settle down.''
Roache advocated investing in the Czech Republic, Hungary
and Poland as safe havens in an emerging market portfolio.
''Although they will probably be affected (by Asian fallout) the
fundamentals are better in those countries,'' Roache said.
''We're telling clients to go overweight in those. Once
conditions deteriorate the rationale to go overweight becomes
compelling. Their monetary policy is already very tight and
growth is quite robust.''
Atmerja said she was ''happy to be underweight Russia.'' She
added that from an equity standpoint, until recently Russia was
seen as an asset play, making the market liquidity driven.
''Since that approach has changed, investors have started to
focus on the fundamentals of the companies and the outlook for
earnings,'' she said.
''There has been a lot of disappointment,'' she added. Very
high real interest rates might have supported the rouble but
they had hampered economic growth and equity earnings had been
''dismal'.
These factors and current account and fiscal deficits were
more significant to investors than the new government's chance
of achieving political and structural reforms before the
parliamentary elections due at the end of 1999, they said.
''The warning indicators in emerging markets are an
overvalued currency, a current account deficit and a fiscal
deficit. Reserves are a red herring because they can change so
fast... You've got to look at where the external deficits lie,''
said Roache.
The outlook was not entirely gloomy, however.
Charles Blitzer, director of emerging market research at
Donaldson, Lufkin, Jenrette, said Russia's deficit was sharply
down on last year, tax collection was up, arrears steadying and
the government was taking steps to cut expenditure to help the
budget.
But he admitted a relatively hands-off approach to the
rouble had resulted in ''ridiculously'' high interest rates in the
short term.
Furthermore, he said there was uncertainty over the banking
system, exchange rate policy and the fiscal situation.
''They have all led to negative sentiment on Russia but it
has now gone beyond what would be justified by these concerns,''
Blitzer said, adding that the challenge to the government was to
reassure markets that they were doing the right things.
''When that happens we will see a sharp rally. The real
situation in Russia is better than market sentiment would have
it but Russia has got to more clearly deal with its problems,''
he said. |
