Mark Dampier: Look East, where streets are still paved with gold
Saturday 08 January 2011
I suspect the recent publicity and jailing for a further six years of the former billionaire Mikhail Khodorkovsky reinforces many people's attitude to Russia. Most investors will be old enough to remember the Cold War, too, which doesn't help. There is little doubt that Russia has a poor image and this is probably why its stock market is one of the most lowly-rated of the emerging economies, with an average price-to-earnings ratio of about seven or eight times. However, in a recent meeting with Elena Shaftan, who runs Jupiter Eastern European Opportunities fund, she reminded me of the many positives about Russia. She also pointed out that she doesn't run a purely Russian fund, but one that invests in the whole region, which includes 25 countries. These range from mature markets, such as the Czech Republic, to less developed Turkey and even Israel – a very different market with low correlation with other east European nations.
That said she still has about 60 per cent invested in Russia. Ms Shaftan explained to me that the Russians are realising they need foreign capital in order to privatise about $166bn of companies, and this has led to a U-turn on President Vladimir Putin's stance towards foreign investment, which she sees as very positive for the market overall. The actions of Dmitry Medvedev, the Prime Minister, have also been important in driving out corruption. So she believes there is a lot going on under the surface that we don't see in the news.
Of course, the Russian stock market is still significantly influenced by commodities, particularly the oil price, and while this remains comfortably above $60 a barrel, the Russian economy looks in good shape. I should further explain that although the price-to-earnings ratio of the market looks cheap, it is partly because many of the energy companies, including Gazprom, are extremely lowly rated. By contrast, many of the domestic companies in Russia trade on much higher multiples, though this has not dampened interest from foreign firms. The recent takeover of Wimm-Bill-Dann, a major dairy and beverage producer, by Pepsi clearly shows that Russia is not out of bounds for multinationals.
Ms Shaftan also likes Poland, a large market primarily driven by domestic demand. It has eastern Europe's third-largest population and is more developed than many of its neighbours. Poland had its credit crisis in early 2000 and has more or less put its house in order since then, with consumer spending remaining robust.
Another country she favours is Turkey, which has been one of the best-performing markets of 2010. It has attracted plenty of new foreign investment with an economy growing at 7 to 8 per cent a year and little domestic borrowing. This lack of leverage is attractive and Turkish banks look healthy and well placed to service the growing economy. Turkey is also still the second-cheapest market in the region after Russia, so the investment case remains intact. This fund is clearly not for widows and orphans as east European markets can be highly volatile. Nonetheless, I feel the long-term story of economic growth in these emerging economies has been rather forgotten about. It is a region with well-educated populations keen to cast off the Communist past and underpinned by an important manufacturing base. Many firms are benefiting from the trend of outsourcing by western European companies taking advantage of a good standard of education and fast delivery times.
Finally, unless the world can find a genuine replacement for oil in the near future, I find it hard to believe the long-term future for the oil price is not upwards. This should bode well for the Russian economy.
When investing in the region you need to know who you can trust. An experienced fund manager such as Elena Shaftan is important. For those who can take the inevitable volatility, the fund is a definite buy for 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
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