Why Hedge Funds Are Loading Up on Rubles

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(Bloomberg – bloomberg.com – Elena Popina – April 10, 2016)

Managers of some of the best-performing funds from Berlin to New York are buying Russian ruble assets as the currency has rebounded 23 percent from a record low.

Stuart Sclater-Booth, who helps oversee more than $40 billion at Stone Harbor Investment Partners, turned overweight on the ruble in mid-February and is betting it will appreciate to as much as 63 per dollar, which would be a 6.2 percent gain from Friday’s closing level. Lutz Roehmyer, who helps manage $12 billion at Landesbank Berlin Investment GmbH, said he adds ruble assets to his portfolio almost every day.

The fund managers are joined by strategists from Goldman Sachs Group Inc. to JPMorgan Chase & Co. who increased their ruble forecasts in March. The more bullish outlook is based on the idea that oil prices, which largely influence Russian markets, have stabilized after falling about 60 percent from last year’s high. While the ruble has risen the most in emerging markets since its record low in January, it has rebounded a little more than half as much as Brent crude, encouraging bets that the currency’s rally will continue.

“We think Russia will offer attractive return potential for the rest of the year,” Sclater-Booth said by phone from New York last week. “You have tremendous carry in the ruble, we think oil found a bottom earlier this year and the central bank, we think, is going to be successful in bringing inflation down.”

The New York-based money manager, who was formerly the head of emerging-markets strategy at Goldman Sachs Group Inc., has a bigger exposure to Russia than benchmark indexes. The $1.54 billion Stone Harbor Emerging Market Debt Fund outperformed 72 percent of its peers in 2015, according to data compiled by Bloomberg.

Gross domestic product in Russia, the world’s largest energy exporter, has contracted in each quarter since the period ended in March 2015 and isn’t forecast to resume expansion until the start of next year. International sanctions linked to the Ukraine conflict have exacerbated the impact of slumping commodity prices, prompting some fund managers to avoid the country’s markets. The median estimate of 44 analysts surveyed by Bloomberg is for the ruble to depreciate by 6 percent by year-end.

The deteriorating economy didn’t stop Landesbank’s Roehmyer, whose firm invests in 64 currencies, from increasing his ruble exposure from 1 percent to 3 percent of his portfolio in 2015 and to 4 percent this year.

“We expect some additional advances in oil prices, and we expect the ruble to continue strengthening against the basket of the dollar and the euro,” Roehmyer said by phone from Berlin last week. His $728 million Weltzins-Invest outperformed 93 percent of competitors in 2015. A unit of Landesbank in Baden-Wuerttemberg was the most accurate forecaster for the nation’s currency in the first quarter, data compiled by Bloomberg show.

Currency Gain

The ruble has rallied 23 percent from its record low, while Brent crude gained 43 percent during the same period. The rebound prompted UBS Wealth Management, which in January added the ruble to its list of the most-preferred currencies in developing nations, to say that the rally has gone too far.

For Steve Hooker, who helps oversee $11.5 billion as a managing director and portfolio manager of Newfleet Asset Management, this year’s rally in the Russian currency means it’s time to find lucrative returns somewhere else. While Hooker said he has made tactical trades on volatility, he hasn’t changed his total exposure to Russian debt, which makes up about 6.2 percent of his Virtus Emerging Markets Debt Fund.

“I’m OK with letting it ride and being a bit greedy to see if I can squeeze out some more gains, but I am looking to be a seller given where current valuations are and given the move that we’ve seen,” Hooker said from Connecticut last week. “From the oil standpoint, we are in the lower for longer camp. The room to go is limited, and there might be better opportunities elsewhere.”

Price Swings

Hooker holds Ukrainian debt and recently bought Poland’s and South Africa’s 10-year debt.

The ruble’s rebound has come with the widest price swings in emerging markets. Its historical three-month volatility is 30 percent, the highest among 24 developing-nation currencies tracked by Bloomberg.

“The headwinds are still there, and the oil uncertainty is not going away,” Roehmyer said. “But generally we like the ruble story. There can be some good opportunity in the market.”

Article ©2016 Bloomberg L.P. All Rights Reserved. Article also appeared at bloomberg.com/news/articles/2016-04-10/stone-harbor-to-landesbank-buying-ruble-as-rebound-trails-crude