Liontrust Russia Fund Q4 2021 review | Insights | Liontrust Asset Management PLC

The Liontrust Russia Fund returned -5.4% for the quarter, versus the MSCI Russia 10-40 Index return of -8.8%*.

Russian equities had a positive start to the quarter, as the market made a new high for the year in October but faded into yearend as geopolitical tensions resurfaced.

The Russian economy grew by 4.3% yoy in the third quarter of 2021 implying not only that it has now exceeded pre-pandemic levels but has reached the pre-pandemic longer run trend. Inflationary pressures remain with CPI reaching 8.4% in November and December. As a result, the CBR continued to hike interest rates by a further 100bps in December to 8.5%. As inflation eases through 2022, we may be at the end of the hiking cycle and the CBR could have the opportunity to cut rates in order to meet its 1-2% real interest rate target.

We continue to believe that a Russian military campaign to subjugate all or part of Ukraine is unlikely. Putin is likely to remain reactive and a Russian military occupation of the Donbas would only occur in response to the Ukrainian government seeking a military solution. With presidents Putin and Biden talking in December and talks scheduled for January between Russia and the US, NATO and OSCE, there is an opportunity for the misunderstandings on both sides to be cleared up somewhat. It is also an acknowledgement by the US that Russia has legitimate concerns over NATO enlargement. Russia’s aim is to keep the Donbas conflict frozen, and any tensions are designed to remind Washington and Europe of Russia’s red lines. In fact, it is in both Russia and the US’s common interest to keep the conflict frozen as both sides would have too much to lose by escalating the conflict. There is room for some de-escalation as these talks happen, and Putin and Biden may also have an in person meeting this year.

The Liontrust Russia Fund fell by 5.4% in the fourth quarter to finish the year with a +18.9% return. The materials sector was the standout performer supported by the continued strength in the global economy and the weaker ruble. More domestic facing sectors fared much worse with financials and consumer staples down 15% and communication services down 25%. Earnings expectations for the Russian market continue to be revised upwards and are now nearly 65% higher for 2021 and nearly 50% higher for 2022 compared with estimates at the start of 2021. This has resulted in a significant derating of the market with the MSCI Russia 10-40 Index now trading at just 6x forward earnings. There is clearly a significant geopolitical risk premium embedded in valuations. There would no doubt be further downside if the conflict in Ukraine saw material escalation, but as both sides are incentivised to avoid escalation and are now talking more frequently, we see potential for de-escalation in the months ahead.

Discrete years' performance (%)**, to previous quarter-end:

	Dec-21	Dec-20	Dec-19	Dec-18	Dec-17
Liontrust Russia C Acc GBP	18.9%	0.4%	32.7%	6.2%	5.3%
MSCI Russia 10/40	14.2%	-4.6%	37.4%	5.2%	-8.0%

*Source: FE Analytics as at 31.12.21.

**Source: FE Analytics as at 31.12.21.

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