After rocketing last year, Russia’s RTS Index dropped by around 5% in 2010. And with a 2010 p/e of 6.6, its valuation discount to the MSCI Emerging Markets Index has widened to 40%.
That discount is about 10% bigger than usual, says Jason Bush on Breakingviews. Yet Morgan Stanley expects Russian earnings to top the emerging markets tables this year as the economy recovers. After a 7.9% slide in 2009, the World Bank is forecasting growth of 4.5% this year. Profits are set to grow by more than 50% over the same period – more than double China’s pace – reckons the bank.
So why aren’t investors rushing in? One problem is that the longer-term outlook appears less compelling than for other BRIC economies. “The global crisis has laid bare deep-seated structural problems that policy makers need to address,” says Timothy Ash of RBS on FT.com. One is that there has been scant diversification in the oil-heavy economy over the last few years. Indeed, 80% of exports are commodity related and 45% of budget revenues stem from oil. There has also been a huge government spending spree: the budget now balances at more than $90 a barrel, up from $25 in 2002. Reining in spending won’t be easy with the population ageing and rapidly declining.
Russia is making the right noises, however, says Capital Economics. President Dmitry Medvedev has announced a reduction in the number of sectors barred to foreign investors from 208 to 41. And simplified immigration rules should help tackle the “looming demographic crunch”. But it’s too soon to say Russia has turned the corner on reform. Until corruption, weak property rights, and red tape are tackled, foreign investment is likely to remain low.
There’s also a shorter-term reason Russia is lagging. Given its dependence on oil, the market is essentially a volatile barometer of the global growth outlook. As fears of a double-dip mount, foreign investors have taken fright. They may well remember that the market slumped by 80% in just six months in 2008, as Bush points out. There are plenty of opportunities in Russia but they all seem likely to be selling for less in a few months’ time.