Mark Dampier: 'Unloved and undervalued - that's the case for investing in Russia'

Turbulent conditions combined with extremely low valuations often present an opportunity

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The Independent Online

Funds focused on a single sector or country are exposed to the vagaries of the particular market in which they invest. It may sound obvious, but it is a point all too often forgotten. When things turn sour and the market declines, the fund manager usually has nowhere to hide. Consequently, such funds will always be inherently more volatile.

The ideal time to invest in these funds is often following a period of decline in their market of focus. Just look at biotechnology. The sector had been out of favour and delivered lacklustre returns for several years. It finally reached a turning point a few years ago, and performance since has been remarkable.

More recently, Russia has fallen into the spotlight as one of the most unloved places to invest. Unsurprisingly, one fund unable to avoid this tumultuous market is Neptune Russia & Greater Russia, managed by Robin Geffen. That said, I should point out the fund has risen by 17 per cent over the year so far.

Investors could be forgiven for disregarding Russia as an investment destination – the country has been dealing with a collapsed currency, tumbling oil prices, recession, ongoing conflict with Ukraine and international sanctions. It was feared the weakening rouble could start a banking crisis last year. By the end of 2014, interest rates had been hiked up to 17 per cent, in part to combat rising inflation (rates have since fallen back some way).

Mr Geffen and James Dowey, chief economist at Neptune, believe the Russian central bank actually handled the interest rate rises very well. They now expect aggressive rate cutting throughout the remainder of this year, possibly by as much as 5 per cent.

Their views oppose consensus figures, which suggest flat GDP growth in 2016, rising to 1 per cent the following year. Neptune has forecast economic growth of 2 per cent next year, and up to 3 per cent in 2017. Mr Dowey believes the difference is so marked because the consensus isn't factoring in central bank support.

He also believes the oil price falls aren't as detrimental to Russian companies as many people expect. When oil prices decline, the depreciation of the rouble helps to offset a decline in companies' profitability to a degree. The costs borne by oil companies in an environment of a weakening currency are offset by the revenues brought in by overseas buyers with stronger currencies. As such, many of these businesses are able to maintain profits. Perhaps Russia's fortunes are not predicated on rising oil prices alone after all.

Elsewhere, Mr Geffen doesn't anticipate an escalation of the Ukraine crisis, which is in both sides' interests to settle, although he concedes there is no chance of Russia handing back Crimea.

In recent years, the Neptune Russia & Greater Russia fund has underperformed its benchmark. Mr Geffen attributes this to a lack of focus on fundamentals (the prospects for individual companies), whereas far more emphasis has been placed on political and economic concerns. He tends to buy companies with a three to five-year view, and once the fundamentals reassert themselves, he believes this fund could undergo a strong recovery.

In Mr Geffen's view, the Russian stock market is extremely good value based on most measures. Turbulent conditions combined with extremely low valuations often present an opportunity. That said, while much of the bad news could already be factored into share prices, there are challenges ahead and markets can remain cheap and out of favour for a long time, so prices could fall further.

Any improvement could rely more on the thawing out of political risks and a change from the West in terms of sanctions, providing the Ukrainian situation settles down. Ultimately, investors could begin to focus on underlying company fundamentals once more.

Clearly, this is not a fund for the weak-hearted investor; I would only ever suggest it makes up a small percentage of an overall portfolio. The one thing I do know about investing in this fund now is that you certainly won't be buying it at its peak.

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

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