The Analyst: Russia looks far from a bear market
Saturday 23 August 2008
Conflict between nations often puts a dent in investor sentiment. This was in evidence recently when the Russian market reacted very negatively to the conflict in South Ossetia.
But the Russian market was weighed down by other factors before the conflict. Chief among these were a fall in the oil price and the government's interference in the pricing of coal. South Ossetia was just another factor adding fuel to the fire. However, this should not have a significant impact on Russia's economy or corporate fundamentals. Over the long term, these are what will drive market performance .
Although Russia has a poor image in the West, we should not lose sight of the investment opportunities the region has to offer. Valuations are now at levels last seen over five years ago, making them highly attractive. The difference today is that the Russian economy is significantly stronger than back then. Also remember that the oil price was around $30 (£16) per barrel five years ago compared to over $100 (£54) now, and this has been a huge driver of Russia's growth.
The Russian market has gone up by more than 1,400 per cent over the last 10 years. It continues to offer compelling opportunities and, while there are various routes into the region, I believe the JPMorgan New Europe Fund is worth considering.
The advantage of this fund is that its investment universe extends beyond Russia. It currently has 66 per cent in Russia, but the fund also invests in the fast growing regions of Eastern Europe. This gives it an element of diversity in what is a higher risk region.
What's more, JPMorgan was an early investor in the region. The fund has been managed by Oleg Biryulyov since its launch in 1997. He is based in Moscow, but supported by a co-manager, Sonal Pandit, in London.
There are currently three dominating themes in the portfolio. The commodity cycle is one; oil and gas accounts for nearly two-thirds of Russia's exports and the general rise in prices have helped bolster Russian growth. Russia's dependency on these commodities is high, so economic diversification is the government's top priority.
This leads into the next theme of consumption and infrastructure spending. Wages have risen over time and domestic consumer demand has been strong as a result. In terms of infrastructure, a vast sum of money is being directed into the country which will boost the construction, property and transport industries. One of the south-western cities, Sochi, is hosting the 2014 Winter Olympics, which is also due to prompt a large cash injection into the region.
The final theme is the expanding links between Central and Eastern Europe. This has been leading to an alignment of the legal and economic frameworks, a lowering of interest rates, and the development of the financial sector. Experience from countries that have joined the EU shows productivity and real wages have risen substantially from low levels and this has helped businesses to grow.
This is a fairly aggressive fund with a focused portfolio of 45 to 65 holdings. The manager will put full conviction behind his ideas; if he doesn't like a stock, he won't own it. A good example is Gazprom, which the fund currently has no exposure to, despite the fact it makes up over 26 per cent of the Russian index.
Instead, the manager is positive on companies such as Mechel, which should benefit from the infrastructure story despite the bad publicity it has received recently.
Few funds have delivered a positive return over the last year but this one has. It is up 11.4 per cent versus 5 per cent for the MSCI Emerging Markets Europe Index.
Although past performance is not always a guide to future returns. There are some fruitful investment opportunities in Russia and its neighbouring regions, and this fund is well placed to capture those long-term growth prospects.
Meera Patel is a senior analyst 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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