Mark Dampier: A risky but profitable market for the brave

The Analyst

The troubles in Egypt are a reminder to investors in emerging markets that economic and stock market risk can be exacerbated by political issues. The Egyptian stock exchange has been closed for days because of the anti-government protests, so owners of shares listed there do not even have the option of selling until it re-opens. Of course, Egypt is not one of the major emerging markets, rather a "frontier" investment proposition with a nascent, illiquid market. Nonetheless, political risk for those investing in emerging markets is nothing new and it is worth bearing in mind.

Indeed, one of my favourite markets at the moment, Russia, carries a degree of political risk, which is one reason for the inexpensive valuations of many its shares. There are a number of specialist funds investing in Russia and I have been a particular fan of the Neptune Russia and Greater Russia Fund since it launched, but it is always interesting to meet other managers investing in the area. I was especially keen to meet Hugo Bain and Peter Jarvis, the managers of Pictet Russian Equities, a fund that has closely matched the Neptune one in terms of performance.

Although not well known to British investors, Pictet is one of Switzerland's largest private banks and puts significant resources into the EMEA (Europe, Middle East and Africa) region, with dedicated traders, a team of 17 analysts and an emerging market debt team. They have a proprietary system which looks to find undervalued companies where the share price does not fully reflect what the company owns. Some 120 companies are screened by this method, and they follow this up with consideration of regulation within the industry and by meeting key personnel to assess management quality.

There is also a focus on liquidity – essentially how easy it is to trade the shares. The Russian market can be a real roller-coaster and the team has seen two 80 per cent falls from peak to trough, so it likes to be ready to cut a position quickly if it needs to. The portfolio tends to be relatively concentrated between 22 and 35 stocks, and may also include shares of companies in Ukraine, Kazakhstan and Georgia.

The Russian stock market is dominated by energy and commodity stocks and highly correlated to the price of oil, but perhaps not quite in the way you would expect. The Pictet team has identified oil price rises have a relatively small effect on Russian energy stocks, and shares in other sectors go up faster. This is because a progressively higher amount of oil company profit is taken in tax as prices rise. Additionally, a buoyant oil price magnifies the trickle-down effect on consumer spending, allowing retailers and other domestically orientated firms to flourish – so it is these areas that benefit more.

Among the largest holdings in the fund are commodities stocks Norilsk Nickel, and Gazprom. Sberbank completes the top three, but note the fourth-largest stock is Magnit, a food retailer. The food market in Russia is still in its infancy and growing fast, and consolidation has only just begun. So far, Magnit has 3,500 convenience stores and 60 hyper-stores, but it is opening 500 convenience stores a year, which tend to be profitable after one year. This type of stock could prove a big beneficiary from the growth in the economy, especially if the company can move into a position of dominance.

The Russian stock market remains on a remarkably low price-to-earnings ratio of approximately eight times, a large discount to other emerging markets. Some of this discount is deserved because of political worries, but I agree with the Pictet team that it seems excessive. Given the vast reserves of oil and other commodities in Russia, I can see the Russian economy improving further.

Russia is some way behind other emerging markets in creating a consumer culture, as is much of eastern Europe, so if you can tolerate the risk some exposure to a fund like this could prove worthwhile over the long term.

Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds included in this column, visit www.h-l.co.uk/independent.

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

PROMOTED VIDEO
News
The data shows that the number of “unlawfully” large infant classes has doubled in the last 12 months alone
i100Mike Stuchbery, a teacher in Great Yarmouth, said he received abuse
Arts and Entertainment
The starship in Star Wars: The Force Awakens
filmsThe first glimpse of JJ Abrams' new film has been released online
Sport
Rio Ferdinand returns for QPR
sportRio Ferdinand returns from his three-game suspension today
News
The Speaker of the House will takes his turn as guest editor of the Today programme
arts + ents
News
people

Watch the spoof Thanksgiving segment filmed for Live!
Sport
Billy Twelvetrees will start for England against Australia tomorrow with Owen Farrell dropping to the bench
rugbyEngland need a victory against Australia today
Arts and Entertainment
The cover of The Guest Cat – expect to see it everywhere
books
Sport
Tyson Fury poses outside the Imperial War Museum in south London ahead of his fight against Dereck Chisora
boxingAll British heavyweight clash gets underway on Saturday night
News
i100 Charity collates series of videos that show acts of kindness to animals
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Austen Lloyd: Company Secretary

    Excellent Package: Austen Lloyd: EAST ANGLIA - SENIOR SOLICITOR LEVEL ROLE** -...

    Citifocus Ltd: German Speaking Client Specialist

    £Attractive Package: Citifocus Ltd: Prestigious asset management house seeks a...

    Citifocus Ltd: Performance & Risk Oversight

    £Negotiable: Citifocus Ltd: This is a varied role focusing on the firm's mutua...

    h2 Recruit Ltd: Sales Director - SaaS (SME/Channel) - £140,000 OTE

    £90000 - £140000 per annum + benefits: h2 Recruit Ltd: Are you a high achievin...

    Day In a Page

    Homeless Veterans Christmas Appeal: ‘We give them hope. They come to us when no one else can help’

    Christmas Appeal

    Meet the charity giving homeless veterans hope – and who they turn to when no one else can help
    Should doctors and patients learn to plan humane, happier endings rather than trying to prolong life?

    Is it always right to try to prolong life?

    Most of us would prefer to die in our own beds, with our families beside us. But, as a GP, Margaret McCartney sees too many end their days in a medicalised battle
    Thomas Cook's outgoing boss Harriet Green got by on four hours sleep a night - is that what it takes for women to get to the top?

    What does it take for women to get to the top?

    Thomas Cook's outgoing boss Harriet Green got by on four hours sleep a night and told women they had to do more if they wanted to get on
    Christmas jumper craze: Inside the UK factory behind this year's multicultural must-have

    Knitting pretty: British Christmas Jumpers

    Simmy Richman visits Jack Masters, the company behind this year's multicultural must-have
    French chefs have launched a campaign to end violence in kitchens - should British restaurants follow suit?

    French chefs campaign against bullying

    A group of top chefs signed a manifesto against violence in kitchens following the sacking of a chef at a Paris restaurant for scalding his kitchen assistant with a white-hot spoon
    Radio 4 to broadcast 10-hour War and Peace on New Year's Day as Controller warns of cuts

    Just what you need on a New Year hangover...

    Radio 4 to broadcast 10-hour adaptation of War and Peace on first day of 2015
    Cuba set to stage its first US musical in 50 years

    Cuba to stage first US musical in 50 years

    Claire Allfree finds out if the new production of Rent will hit the right note in Havana
    Christmas 2014: 10 best educational toys

    Learn and play: 10 best educational toys

    Of course you want them to have fun, but even better if they can learn at the same time
    Paul Scholes column: I like Brendan Rodgers as a manager but Liverpool seem to be going backwards not forwards this season

    Paul Scholes column

    I like Brendan Rodgers as a manager but Liverpool seem to be going backwards not forwards this season
    Lewis Moody column: Stuart Lancaster has made all the right calls – now England must deliver

    Lewis Moody: Lancaster has made all the right calls – now England must deliver

    So what must the red-rose do differently? They have to take the points on offer 
    Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

    Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

    It's in all our interests to look after servicemen and women who fall on hard times, say party leaders
    Millionaire Sol Campbell wades into wealthy backlash against Labour's mansion tax

    Sol Campbell cries foul at Labour's mansion tax

    The former England defender joins Myleene Klass, Griff Rhys Jones and Melvyn Bragg in criticising proposals
    Nicolas Sarkozy returns: The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?

    Sarkozy returns

    The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?
    Is the criticism of Ed Miliband a coded form of anti-Semitism?

    Is the criticism of Miliband anti-Semitic?

    Attacks on the Labour leader have coalesced around a sense that he is different, weird, a man apart. But is the criticism more sinister?
    Ouija boards are the must-have gift this Christmas, fuelled by a schlock horror film

    Ouija boards are the must-have festive gift

    Simon Usborne explores the appeal - and mysteries - of a century-old parlour game