Ben Aris in Moscow -
Nathan Rothschild once famously said, "buy on the sound of canons, sell on the sound of trumpets." However, the few investors that were still looking at Ukraine are fading away as the cycle of violence escalates and the body count rises. War is close and the situation has gone from a punt on possible scenarios for a resolution to totally unpredictable.
"It is difficult enough for the best minds in Western policy/analytical circles to figure out where Ukraine is going now (actually I now seem to know most of them, and the best amongst them are happy to admit that they don't), so it is nigh on impossible for investment managers in London, stateside or elsewhere to make calls as to whether or not it is prudent or likely profitable to have exposure to Ukraine," writes Tim Ash, head of research at Standard Bank. "Investing in Ukraine is now a very big punt, which can go either, and in fact any, way"
Some investors were tempted back into the market after the IMF signed off on a new Standby Agreement with Kyiv earlier this month. Ukrainian bonds got a boost from the $17bn two-year aid package that will shore up the hryvna and give the government some fresh working capital.
JPMorgan advised clients earlier this year to buy Ukrainian bonds saying that civil war was an “extreme” scenario, reports Bloomberg. The bank has now backed away from that recommendation and is warning of “huge” economic fallout if harsh sanctions are imposed on Russia or fighting escalates beyond the levels seen in the last few days. Other banks are making similar recommendations, either advising buy only the shortest maturities or simply marking the entire asset class down as "sell".
Yields on Ukrainian Eurobonds have soared over 200 basis points in the last month, pushing them close to the all time high of 11.42%, which was set on February 19 as former president Viktor Yanukovych was in the midst of being toppled by crowds in Kyiv and across the country. Credit default swap ratios have also risen, reports Bloomberg, pricing Ukrainian bonds at a 56% chance of default, up from 43% at the beginning of the year.
The foreign investor with the biggest exposure to Ukraine is Mark Mobius' Franklin Templeton Investments, which was encouraged by the interim government's commitment to getting the IMF deal done. On the back of that, it bought about a quarter of Ukraine's entire debt stock. The fund holds a total of $7.6bn of Ukrainian bonds and $200m of equities, according to its latest filing.
Up until a week ago the fund remained bullish on its punt. "Right now our calculation is that the reward is better than the risk for both the Russian and Ukraine investments," Mobius told Reuters. "Most of the assets and investments that we have in Ukraine are in the western side, the non-Russian speaking side. The word we're getting from the companies in which we invested is 'no big deal'. For Russia, prices have been really depressed, and the valuations are extremely attractive."
Mobius has not commented on his investments since, but he must be starting to wonder as Ukraine moves ever closer to the brink of total meltdown.
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