Investors in the Russian stock market have taken a severe battering in recent
months. Shares have fallen by 70 per cent from their summer high and trading
has had to be suspended on several occasions to allow order to be restored
in the face of heavy selling.
Now a fierce tug-of-war has broken out between those arguing that Russia
should be avoided because it is simply too risky and those who contend that
Russian stocks now look cheap. The glass-half-full camp points to Russia's
overall financial strength and cheap share valuations as reasons for buying
the market. The glass-half-empty brigade cites Russia's conflict with
Georgia and dramatic share-price falls of the past two months as reasons to
be wary.
Marina Akopian, of Hexam Capital, the emerging-markets specialist investment
manager, is firmly on the side of the optimists. She says that the recent
share-price falls have created an incredible buying opportunity because
share prices no longer reflect the profits that companies are reporting. She
believes that the market has overreacted to the Georgia conflict, creating
an anomaly that adventurous investors can exploit.
She says: “The Russian market has priced in a worse scenario than the
financial crisis of 1998, which is simply ridiculous in my view. The Russia
of today is very different from that of ten years ago. Russia now has no
debt, a strong budget surplus and a large trade surplus. Despite this strong
position, the stock market is now 70 per cent below its high for the year
and there are some incredible bargains to be had.”
Robin Geffen, manager of the Neptune Russia & Greater Russia fund, is also
bullish about the country. He accepts that lower oil prices have played a
part in the recent sharp falls in the Russian stock market, more than 60 per
cent of which is energy stocks. But he says that Russia is also experiencing
strong domestic demand for consumer goods from the expanding middle class,
and this makes up a large part of Russia's current economic growth.
He maintains that there are attractive listed companies engaged in many
non-energy sectors, such as banking, telecoms, food manufacturing and
retailing, and his own fund has only 22 per cent of its portfolio in energy
stocks, against 28 per cent in consumer staples. He adds: “Russia has its
problems, but it also has a lot going for it right now. Its growth rate is
an impressive 8 per cent, while shares are trading on low valuations of
about five or six times earnings, which is cheap by any reckoning. There is
no mountain of debt in the Russian financial system, as there is in many
Western countries, so there is huge scope for developing consumer finance.”
But other commentators are less happy with the way that companies and
shareholders are treated in Russia. Joanne Irvine, head of non-Asian
emerging markets at Aberdeen Asset Management, says: “Standards of corporate
governance in Russia are poor and the Government has a sizeable stake in
many of the largest companies. For example, it has a majority stake in
Gazprom, the energy company, and runs it with a political agenda.”
She points out that in the case of Yukos, another energy company, the
Government used tax issues to pursue Mikhail Khordokovsky, the company's
principal shareholder and an increasingly vocal critic of the Government. In
the end the company was effectively bankrupted, Khordokovsky sent to jail
and shareholders lost virtually everything. She adds: “Russia has huge oil
and gas reserves, but businesses there are not transparent and the long-term
outlook for many of them is not clear. We have largely avoided Russia
because we think that the risks of investing there are too great. The one
investment we do hold is in Lukoil, which is much more transparently run
than most companies, partly because Conoco, the US oil company, has a large
stake.”
Nigel Parsons, of Bestinvest, the independent financial adviser, says that the
recent dramatic falls in the Russian stock market reflect two key problems.
The first is that, despite Russia's efforts to diversify, the country's
economy and stock market are still dependent on the energy sector and at the
mercy of volatile oil prices. When the price of oil rises to $140 a barrel,
the Russian stock market soars. When the oil price falls back sharply,
Russian shares plummet.
Secondly, investors in the region are rediscovering the importance of risk
pricing after events such as Russia's conflict with Georgia and the troubled
saga of the oil company TNK-BP, the BP joint venture with Russian partner
TNK. Mr Parsons says: “For as long as commodity prices kept rising,
investors appeared to forget about the politics. In reality, Russia should always carry a higher risk premium for political influence than we apply to
Western economies.”
One way of mitigating this risk is to invest in large foreign multinationals,
rather than domestic Russian ones. Another reassuring point is that Russia
still requires foreign capital and expertise to develop both its oil
industry and its wider infrastructure, which should help to dissuade it from
alienating foreigners.
John Hatherly, of Seven Investment Management, the wealth manager, says that
people wishing to invest in Russia should understand that it is a very
different place to do business. “The majority of companies are controlled by
oligarchs or by the Government,” he says. “You will not have control over
those companies, so you have to decide whether your interests coincide with
those of the oligarchs and the Government. If they do, then you could
consider investing, but do so with your eyes open.”
Mr Hatherly says that the low valuations currently placed on Russian stocks
reflect the risks that the market is pricing in, adding: “This country is at
the 'extreme risk, extreme reward' end of the spectrum. It has huge
potential but some big problems. If you decide to buy into Russia, you could
do fantastically well, but it's a case of caveat emptor.
“Those brave enough to go for a single-country fund should consider Robin
Geffen's Russian fund, which is well managed and has an excellent track
record. Those who don't have the appetite for a single-country fund could
try a more general emerging-markets fund.”
Bestinvest likes Jupiter Emerging European Opportunities Fund.
