The firm said that while caution towards Russia is advisable in the short term, there is significant upside potential for longer term investors.
The market is undervalued in the absence of any further escalation, the firm added.
Nathan Griffiths, lead portfolio manager emerging markets equities at ING IM said, “The direct economic impact of sanctions is very limited. There are indirect impacts though, as the central bank decided to calm financial markets by raising interest rates by 1.5%, a move will further weaken an already struggling economy".
"At the same time, the situation has accelerated capital outflows that now stand at almost $70bn and considering that international companies will probably put all inward investments on hold, we believe this will further stunt the economy and potentially lead to a recession in 2014.”
“Despite the attractive valuations, we remain cautious on the outlook for the Russian equity market in the short term. Up until now, there is a greater risk of escalation than a roll back of moves. Also, the concerns that foreign investors have about the risk to their holdings in the country mean they are more likely to reduce than increase exposure, which could lead to further market weakness. Nevertheless, equity markets are inherently resilient to these kinds of crisis situations and Russia has always been a higher risk market.”
“Our current investment strategy is to hold relatively high cash balances, because of the fluidity of the situation. Furthermore, we have a preference for companies with jurisdictions outside of Russia. When events stabilise we will become more constructive.”
The real fear is for a further weakening of economic growth and the risk for escalation as provocations abound, which may spark further hostilities, adds Philip Scrève, senior fund manager emerging markets Candriam. “The Russian stock market will likely remain capped by the fear of further sanctions and isolation.”
On valuation levels of Russian stocks declining to their lowest level since the Russia-Georgia conflict in August 2008, he observes that the Rouble and the Hryvnia have lost over 10% since the beginning of the year and while Russia as a country has a very strong balance sheet, certain Russian companies tend to have relatively high levels of external debt.