Mark Dampier: A risky but profitable market for the brave
Saturday 12 February 2011
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.
Diving in at the deep end is no excuse for shirking the style stakes
Consumers given power to choose a green deal
Mark Dampier: A safe harbour if the market recovery has overreached itself
'Scrap the trap': calls for change grow as banks are told to play fair with loyal savers
Bargain Hunter: Eurostar offers child fares for £1 each way to Paris, Brussels and Lille
Relaxed pensions rules: Guide to what they mean to you
- 1 Game of Thrones author George RR Martin says 'f*** you' to fans who fear he will die before finishing Westeros saga
- 2 Loom bands: Bids for dress made from colourful rubber pass £170,000 on eBay
- 3 Why I'm on the brink of burning my Israeli passport
- 4 L'Oreal cuts ties with Belgium supporter Axelle Despiegelaere after hunting trip photographs
- 5 The true Gaza back-story that the Israelis aren’t telling this week
Sustained immigration has not harmed Britons' employment, say government advisers
War is war: Why I stand with Israel
7/7 memorial defaced on anniversary of 2005 attacks with ‘Blair lied thousands died’ graffiti
Australia facing international condemnation after turning around Sri Lankans at sea
Even when it brutalises one of its own teenage citizens, America is helpless against Israel
Socialist Worker called to apologise over ‘vile’ article saying Eton schoolboy Horatio Chapple's death is ‘reason to save the polar bears’
iJobs Money & Business
£70000 per annum: Harrington Starr: Information Security Manager (ISO 27001, A...
£75000 - £85000 per annum + ex bens: Deerfoot IT Resources Limited: Biztalk Te...
£60000 per annum: Harrington Starr: Trade Desk Specialist (FIX, Linux, Windows...
£35000 per annum: Harrington Starr: Service Desk Analyst (Windows, Active Dire...
Day In a Page
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green
Look forward to a brighter future at two-bedroom Sunny Cottages, ideal for Londoners looking to downsize
A three-bedroom red-brick cottage with outbuildings and pretty gardens, £200,000
This three-bedroom flat within a former textile factory spans the corner of the fourth floor and has a balcony
A charming four-bedroom Oxfordshire cottage with oak floors and chunky-beamed ceilings, £465,000
A beautiful one-bed flat in a sought-after portered block, with access to Norland Square communal gardens
A one-bedroom flat within a Sixties school conversion with high-spec design and open-plan kitchen, close to Lambeth North Tube, £435,000
A 17th century four-bedroom house, with open fireplaces, cellar and pool, £600,000
A three-bedroom, coach house with luxury open-plan living space and contemporary breakfast bar
A newly refurbished one-bedroom flat in the heart of Mayfair, close to Grosvenor Square