Mark Dampier: Russia a bear market? Not for long
Saturday 07 February 2009
When dealing with stock markets, we all end up with egg on our face occasionally; undoubtedly, over the last year or so, Russia has been my egg. The market has fallen around 75 per cent, making it one of the worst emerging markets. This is even more galling because Russia never reached the high valuations seen by many other emerging markets. According to Elena Shaftan, who manages the Jupiter Emerging European Opportunities Fund, Russian companies are now priced at just three times earnings, which makes them look extremely cheap.
There are, of course, two ways to play Russia. You can buy a pure fund such as the Neptune Russia & Greater Russia fund, or you can buy a somewhat more diverse fund, such as the Jupiter one that also invests in Eastern Europe.
In fact, Shaftan has reduced her Russian exposure quite significantly, firstly in July on the Russian invasion of Georgia and then again in November, by which stage she had no more than about 30 per cent of the fund's assets in Russia.
One of the problems of Russia is the treatment it gets from the western press, which is always eager to cast Russia as the villain in any story. Even so, the brief war against Georgia hardly helped Russia's stock market – and this was followed by a huge fall in oil prices from $147 (£101) a barrel to at one point less than $35, which then had a knock-on effect on the rouble. However, Shaftan thinks two things are beginning to happen that may change the outlook for the country's stock market.
Firstly, the rouble has already fallen by almost 30 per cent, which she believes is bullish for the market and will make the Russian economy more competitive. In addition, she also believes that oil prices, which are a key element of the Russian economy, are beginning to stabilise. Some stability in the currency would be useful because it would enable the government to stop defending the rouble and instead push money into the Russian economy.
Certainly the Russians need to concentrate on other things. Industrial production fell 10.3 per cent (year on year) in December and, of course, Russia is not completely isolated from what is happening elsewhere in the world. Indeed, given its nature as a high risk market, it is perhaps unsurprising that it suffered so much in this global downturn, as investors have a habit of fleeing to markets that are perceived as safer.
I would, however, contend that a market valued at just three times earnings and an economy that is in far better shape than a decade ago, despite the global recession, looks like a buying opportunity. Unfortunately, it will take time and patience, so Russia is only a market for long-term investors; contributing via a regular savings plan or by making small investments on the market's bad days seems like the best strategy.
As I mentioned above, though, this fund is not just about Russia. Investments are also made in Poland, the Czech Republic and Turkey. It can also invest in the Baltic states, Romania, Bulgaria and Ukraine – but these have been avoided recently, given their high and growing debt burdens. On the other hand, Polish growth rates have been positive and should remain so throughout 2009. It has low public debt with a manageable current account deficit. Meanwhile, Turkey has been a beneficiary of falling prices for food and oil, and with its stock market valued cheaply and further interest rate cuts expected, it looks good value.
The fund has had a reasonable high weighting in cash, with the largest country weightings being 34 per cent in Russia, 15 per cent in Poland, 10 per cent in Turkey and 8 per cent in the Czech Republic.
It has certainly been a torrid ride for investors in Russia – I know, because I own both the Jupiter and Neptune funds myself. However, I am not giving up on the region. It might feel like we are in a perpetual recession, but eventually the world economy will turn around and investors will be more willing to take on risk. That is the time when markets like Russia will really come back into fashion.
Mark Dampier is the head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more information about the funds included in this column, visit www.h-l.co.uk/independent
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