What We See in Russia
Tim Steinle, co-manager of the U.S. Global Investors Eastern European Fund (EUROX), recently traveled on a research trip to Russia. In addition to attending a Renaissance Capital conference in Moscow, Tim visited the Krasnodar region—home to the 2014 Winter Olympic Games and the key Novorossiysk commercial port. Novorossiysk is the only commercial sea port in Russia that doesn’t freeze over in the winter, allowing it to remain active year-round.
Krasnodar’s economy fared well during the crisis and income per person in Krasnodar City is twice the national average. Income is important for Russia because it aides in creating more consumption and domestic growth of the economy. Russia has made strides to diversify its economy away from natural resources in recent years but progress has been sluggish at times.
Tim believes that the consumer sector holds some of the best opportunities in the Russian market.
When many think of Russia, they think of natural gas, oil or other natural resources but the economies of Russia and the Eastern European region also have more to offer. Russia’s location offers it access to lucrative markets in both Western Europe and Asia, specifically China. China’s ever increasing appetite, not only for natural resources but also for other Russian goods, gives Russia a trading partner that lines up geographically and geopolitically.
The Russian government has been instrumental in growing the nation’s industries by providing them much needed financing when the economic situation was most dire. However, the Russian government has not been a corporate piggy bank. After suffering through a sovereign debt crisis in the 1990s that derailed Russia’s economy, the government just recently dipped its toe back into the market in a strategic way so a benchmark rate for lending could be set.
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Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. By investing in a specific geographic region, a regional fund’s returns and share price may be more volatile than those of a less concentrated portfolio. The Eastern European Fund invests more than 25% of its investments in companies principally engaged in the oil & gas or banking industries. The risk of concentrating investments in this group of industries will make the fund more susceptible to risk in these industries than funds which do not concentrate their investments in an industry and may make the fund’s performance more volatile.
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