Ukraine update: Still a basket case, but getting interesting.
We provided an overview of how to invest in Ukraine back in late 2013; it’s been almost 2.5 years and we think it may be time to revisit the country and its markets. Since that time, Yanukovych disappeared, Russia took over Crimea and the country has been mired in conflict between ethnic Ukrainians against ethnic Russians and the Russian state. For a far-more detailed timeline of the Ukraine crisis than you could possibly ask for, check out this link.
In market terms, things have not looked good for Ukraine. Turnover has fallen off of a cliff. See the chart below; the good times certainly appear to be over for now.
Turnover was about $180mm per day when we last checked in, and it is now below $20mm per day. Liquidity has dried up, and positions of any size could take weeks if not months to liquidate. Equity markets are down -63% since the start of 2015, and lower than what were already deeply-discounted values. Ukraine is actually an excellent test case for what could go wrong in a Frontier Market. It provides real-world experience that should be incorporated into any risk budgeting or risk allocation that is made as it relates to Frontier Markets.
Similarly, the currency which had been an oasis of stability since 2008, has depreciated -68% since November 2013 and is currently at its lowest level in the post-Soviet Union era. Any assets in Ukraine have been hammered and decimated. It would be a fair question then, to ask why Ukraine merits anything more than a passing dismissal. The reason, is that asset values have fallen so sharply through 2014, that at some point an opportunity arises for the Mavericks amongst us. Case in point, Ukraine’s bonds were restructured last year, which triggered a credit event. As a result, Ukraine has a manageable debt load, barring any additional instability caused by political events. Earlier this year, Ukraine was also able to arrange a repayment deal with Sberbank on debt backed by the Ukrainian government.
The equity market presents a number of interesting and attracting options. For example, Motor Sich; one of the world’s largest airplane and helicopter makers is trading at an earnings yield of 67% (P/E of less than 2). Concerns that the largest source of revenue (sales to Russia) will never recover have hammered the stock. However, the company has been successful at building an order book from supportive countries such as the United States and Poland. Similarly, UKR Telecom suffered significant declines in revenue after the crisis with Russia began, however earnings have finally stabilized and the company can now focus on growth within the areas that the Government of Ukraine controls. You can find a summary of the market below.
We do not expect foreign investors to reenter Ukraine until the current account deficit has stabilized and GDP growth is clearly recovered. 2015 GDP declined by more than -10% and significant turnover within the government has reduced confidence in Ukraine’s government’s ability to pass legislation that will assist in recovering Ukraine’s economy. Inflation in 2015 was about 40%, driven mostly by currency depreciation. Growth in 2016 is expected to be above 1%, and a positive 1Q and 2Q 2016 GDP reading would certainly assist in bringing back investment to Ukraine.
Keep updated on Ukraine with our dashboard. If you have any questions, please let us know.