The papers are full of stories about “the badly behaving bear”, says Justin Urquhart-Stewart in The Independent. This week’s warning by Russian president Vladimir Putin that Russia might retarget missiles on Europe is just the latest example of Moscow’s increasing bravado on the world stage and frosty relations with the US and Europe. The latter is concerned about the reliability of Russian oil and gas supplies.
Meanwhile, Shell and BP – now set to have an exploration licence revoked – have discovered that property rights “are subject to political control”, says Martin Hutchinson on Breakingviews. Anti-Western leaders, buoyed by high oil prices, can be tempted to grab Western companies, as Venezuela’s expropriation of a telecoms group shows. Shareholders in Russian companies are vulnerable to the same risk, especially if Putin’s successor (elections take place next year) is “more nationalistic”. Tensions with neighbours could even put the economy “on a war footing”. “The politics are horrible” and Russia deserves to trade at a 22% discount to other emerging markets on a p/e of 11.
Political tensions with Europe, along with slowing earnings in the oil sector, which comprises 60% of the market, have dampened sentiment towards the benchmark RTS index of late. It is down by about 5% this year, having risen to over 2,000 from around 300 in 2001. That said, it has shaken off political jitters before; investors – like the Russian population – prize Russia’s economic and political stability after the chaos under Yeltsin. The negative headlines should prove a temporary problem, says Ghadir Abu Leil-Cooper of the Baring Russia Fund; this is a “buying opportunity”.
Eric Kraus of the Nikitsky Russia/CIS Opportunities fund, whose buy recommendation during the Yukos imbroglio (when the RTS was at 700) proved right, says that investors who have ignored predictions of doom in Russia over the past decade have been well rewarded: sentiment will recover as Russia’s excellent fundamentals reassert themselves.
Russia is set to grow by 7% this year and inflation has fallen to 7% from 25% in 2001. Russia boasts both a budget and current-account surplus and foreign exchange reserves of over $330bn. Foreign direct investment should double this year. Business investment is climbing and consumption has taken off – the latter almost doubled to $10bn between 1995 and 2005 – amid falling unemployment and rising incomes; real wages grew by about 12% last year. Consumption could eventually reach $30bn, reckons Profit Hunter. With oil now stronger, Credit Suisse expects overall earnings growth of 14% this year (34% stripping out the energy sector). Throw in the cheap valuation and room for further rate cuts and there’s scope for a 25% rise in the RTS by the end of the year.
One fund to consider if you’re tempted to nibble at Russia is the Neptune Russia and Greater Russia Fund, tipped by Mark Dampier of Hargreaves Lansdown. Investors can spread risk with the Jupiter Emerging European Opportunities Fund, which is 56% weighted towards Russia. Profit Hunter tips London-listed Sistema’s global depository receipts (SSA, $28).
A conglomerate with a core business in the fast-growing telecoms sector, it also dabbles in property, retail and banking. It’s cheap on a p/e of 14.5 and is a “superb” play on the economy’s emerging middle class.