West Palm Beach (HedgeCo.net) – The Russian market continued to sell off in October as the global financial crisis continued to wreak havoc everywhere, according to the Pharos Russia Fund, October was the fifth consecutive month of losses for the RTS Index, and its 36% loss was the third worst month in the history of the Russian market after August 1998 (-56%) and May 1998 (-39%).
During the month of October, the Pharos Russia Fund was down 12.9%, the Pharos Gas Investment Fund was down 12.8% and the Pharos Small Cap Fund was down 27.4%. Meanwhile the MSCI Russia Index was down 35.3% over the same period. The Russian government has been extremely pro-active during the crisis with its financing and stimulus packages. Thus far, more than $200 billion has been made available to the banking sector.
The Ruble dropped against the dollar causing the sector to suffer as it was one of the most popular investment themes of the year, with both Long Only funds and Hedge Funds heavily invested into the sector. As Hedge Fund (Emerging Market, Commodities and Global Macro) deleveraging accelerated rapidly during the month, these stocks were aggressively liquidated, causing very sharp price falls.
The last week of October also saw aggressive action from many of the main government actors on the global stage – the US Fed, ECB, IMF, Central Bank of China, Central Bank of Japan and many others all took steps to inject liquidity into their respective financial systems.
In the face of all of this aggressive government action, economic statistics and corporate results continue to paint a very gloomy picture. Again, the bottom line is that while governments and central banks are stepping in with a huge amount of stimulus, the private sector is slowing rapidly and that slowdown may overrun the extensive government efforts to keep the world economy from contracting.
It will take some time before the outcome of this battle to forestall deflation is known, so the next months look certain to continue to be extremely volatile. During this time of heightened volatility, Pharos looks to a few leading indicators to inform their next moves. The oil market needs to stabilize in order to remove pressure on the ruble. Should the oil price remain around $50/barrel or below, then a 10-15% devaluation of the ruble would be useful for stabilizing the Russian economy and its markets. From these levels, both the ruble and equity markets have become extremely sensitive to the oil price.
"We are well aware that these outcomes will take time to resolve, and remain cautious as a result," Pharos says, "Our approach to risk management here is driven by the increase in realized volatility; we size our positions with an understanding that smaller capital usage generates similar market exposures to that seen prior to the crisis. Although today’s global economy is facing some enhanced probability of a calamity, the most likely outcome is that global demand ultimately is restored. Russia will be a major beneficiary of the world being saved."
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