Time to invest in a country that's amazing but cheap - and that's Russia

The analyst

Here's a good test for amateur economists. Which country saw industrial production increase over the last 12 months while most other nations have seen it contract? It is a country that represented less than 1 per cent of global GDP 10 years ago but nearly 3 per cent today. A further clue: It is likely to be the fifth-largest economy by 2025, overtaking the UK along the way. The answer is Russia.

Despite these amazing facts relating to its growth, Russia is one of the cheapest markets in the world. According to Robin Geffen, manager of the Neptune Russia & Greater Russia Fund, the Russian market traded at a median discount of 22 per cent to other major emerging markets between 2003 and 2008. However, since the financial crises, perceptions of risk have changed and it now trades at a 48 per cent discount. Many investors view Russia with suspicion – not least due to concerns over corporate governance and the rule of law. While these concerns are valid, it does mean Russian equities tend to be overlooked and offer opportunities.

Now Russia is clearly not a market for widows and orphans. Volatility is par for the course, partly due to politics and, more significantly still, fluctuations in the price of oil, upon which much of the Russian economy depends. The Russian stock market has a strong correlation with the oil price, though, interestingly, this does seem to have broken down so far this year with the price of oil rising and the Russian market falling.

Given the high level of foreign ownership in the free float of Russian stocks, it seems they are vulnerable to violent "risk on" rallies or "risk off" falls – and the level of volatility is too much to stomach for many investors. Yet valuation should, in the end, be the safety net, and I would suggest valuations in the Russian market are discounting an awful lot of poor news while largely ignoring the good news.

Last year's merger of Micex and RTS, Russia's two major stock exchanges, signals Moscow's intention of becoming an international financial centre, and it should mean domestically listed shares are easier to trade. Co-operation between Russian oil company Rosneft and US counterpart Exxon Mobil could also point to a thawing stance on resource nationalism, which could help Russian firms exploit the wealth of natural resources available.

Russian finances have also come a long way. During the credit crisis, oil revenues fell, and at the time Russia was a net debtor to the value of $150bn. It has since put that sharp economic contraction behind it, turning the budget deficit to a budget surplus. Corporate and household debt has also fallen rapidly, so the Russian economy could be better cushioned from external shocks going forward.

Following the improvement in finances, the government is spending heavily on infrastructure and the Neptune fund's exposure to industrial and transport companies such as Globaltrans could benefit. The fragmented retail sector remains an area of opportunity too. X5, the largest supermarket chain in Russia, only has a 5.4 per cent share of the market. There is potential to acquire smaller rivals and build a dominant national chain. The technology sector is also interesting, and Yandex (an internet search engine with 60 per cent share of the Russian market) is a key holding in the fund. Russia has a huge internet market but penetration is still only 45 per cent.

Clearly, energy is still an important theme, and 35 per cent of the fund is in this sector. Russia is one of the few places where crude oil production is still rising. Due to its proximity and thirst for energy, China is a key trading partner and exports to it have risen tenfold in the past decade.

Neptune Russia and Greater is not an investment for everyone, but for those seeking strikingly low valuations and possessing the patience and stamina to withstand the volatility I believe Russia remains a fascinating investment story. The forthcoming listing of Sberbank on the London market may well be a welcome catalyst for international investors to look more closely at this market. Many will be surprised to find that Sberbank is Europe's third-largest bank – seemingly without the problems that most European banks have on their balance sheets.

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

Suggested Topics
PROMOTED VIDEO
Sport
Two christmas trees ,Moonbeam (2L), Moonchester (2R) and Santa Claus outside the Etihad Stadium
footballAll the action from today's games
News
Sarah Silverman (middle) with sister Reform Rabbi Susan Silverman (right) and sister actress Laura Silverman (left) at Jerusalem's Western Wall for feminist Hanuka candle-lighting ceremony
peopleControversial comedian stages pro-equality Hanukkah lighting during a protest at Jerusalem's Wailing Wall
Arts and Entertainment
The Bach Choir has been crowned the inaugural winner of Sky Arts’ show The Great Culture Quiz
arts + ents140-year-old choir declared winner of Sky Arts' 'The Great Culture Quiz'
Life and Style
food + drink
News
i100
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Carlton Senior Appointments: Private Banking Manager - Intl Bank - Los Angeles

    $200 - $350 per annum: Carlton Senior Appointments: Managing Producer – Office...

    Carlton Senior Appointments: San Fran - Investment Advisor – Ind Advisory Firm

    $125 - $225 per annum: Carlton Senior Appointments: San Fran - Investment Advi...

    Sheridan Maine: Commercial Finance Manager

    Up to £70,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

    Sheridan Maine: Regulatory Reporting Accountant

    Up to £65,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

    Day In a Page

    Homeless Veterans appeal: 'You look for someone who's an inspiration and try to be like them'

    Homeless Veterans appeal

    In 2010, Sgt Gary Jamieson stepped on an IED in Afghanistan and lost his legs and an arm. He reveals what, and who, helped him to make a remarkable recovery
    Could cannabis oil reverse the effects of cancer?

    Could cannabis oil reverse effects of cancer?

    As a film following six patients receiving the controversial treatment is released, Kate Hilpern uncovers a very slippery issue
    The Interview movie review: You can't see Seth Rogen and James Franco's Kim Jong Un assassination film, but you can read about it here

    The Interview movie review

    You can't see Seth Rogen and James Franco's Kim Jong Un assassination film, but you can read about it here
    Serial mania has propelled podcasts into the cultural mainstream

    How podcasts became mainstream

    People have consumed gripping armchair investigation Serial with a relish typically reserved for box-set binges
    Jesus Christ has become an unlikely pin-up for hipster marketing companies

    Jesus Christ has become an unlikely pin-up

    Kevin Lee Light, aka "Jesus", is the newest client of creative agency Mother while rival agency Anomaly has launched Sexy Jesus, depicting the Messiah in a series of Athena-style poses
    Rosetta space mission voted most important scientific breakthrough of 2014

    A memorable year for science – if not for mice

    The most important scientific breakthroughs of 2014
    Christmas cocktails to make you merry: From eggnog to Brown Betty and Rum Bumpo

    Christmas cocktails to make you merry

    Mulled wine is an essential seasonal treat. But now drinkers are rediscovering other traditional festive tipples. Angela Clutton raises a glass to Christmas cocktails
    5 best activity trackers

    Fitness technology: 5 best activity trackers

    Up the ante in your regimen and change the habits of a lifetime with this wearable tech
    Paul Scholes column: It's a little-known fact, but I have played one of the seven dwarves

    Paul Scholes column

    It's a little-known fact, but I have played one of the seven dwarves
    Fifa's travelling circus once again steals limelight from real stars

    Fifa's travelling circus once again steals limelight from real stars

    Club World Cup kicked into the long grass by the continued farce surrounding Blatter, Garcia, Russia and Qatar
    Frank Warren column: 2014 – boxing is back and winning new fans

    Frank Warren: Boxing is back and winning new fans

    2014 proves it's now one of sport's biggest hitters again
    Jeb Bush vs Hillary Clinton: The power dynamics of the two first families

    Jeb Bush vs Hillary Clinton

    Karen Tumulty explores the power dynamics of the two first families
    Stockholm is rivalling Silicon Valley with a hotbed of technology start-ups

    Stockholm is rivalling Silicon Valley

    The Swedish capital is home to two of the most popular video games in the world, as well as thousands of technology start-ups worth hundreds of millions of pounds – and it's all happened since 2009
    Did Japanese workers really get their symbols mixed up and display Santa on a crucifix?

    Crucified Santa: Urban myth refuses to die

    The story goes that Japanese store workers created a life-size effigy of a smiling "Father Kurisumasu" attached to a facsimile of Our Lord's final instrument of torture
    Jennifer Saunders and Kate Moss join David Walliams on set for TV adaptation of The Boy in the Dress

    The Boy in the Dress: On set with the stars

    Walliams' story about a boy who goes to school in a dress will be shown this Christmas