Why Russia could be a stable investment, despite its rocky history.
Should you invest in Russia?
Russia was one of the top performing equity markets of the 2000s as high oil revenues and a burgeoning middle class proved to be attractive to both companies and investors alike. However, the global financial crisis hit the market hard, as did geopolitical incidents. In 2014, the invasion of Ukraine and Crimea by Russia put a significant dent in its economic outlook then, as the US sought to clip Russia’s wings with sanctions. This was made worse for Russia by the return of oil price declines through 2015. In 2018, Russia was further penalised for the alleged interference in Western politics and subversive activity on UK soil.
Despite this, Russia’s economic fundamentals have remained stable. Unemployment has fallen, international reserves have continued to grow, and it has future-proofed against other external impacts to its economy by putting aside large chunks of energy revenue. Furthermore, its central bank has been shifting away from dollar dependency and cut holdings of US treasuries, boosted its Yuan reserves, and been a very active buyer in the gold market.
In addition, the points below paint an even rosier picture for the brave investor to consider Russia as an investment opportunity.
- Capital flight is easing and Purchasing Manager Index (PMI) & Gross Domestic Product (GDP) figures have been on an upward trend since December 2015.
- Inflation has stabilised around target level, 4%.
- Russian fiscal budget sterilises the oil price at $40 per barrel, which bodes well for Forex stability and keeping the Rouble weak, and most importantly shows a diversification away from their oil exporting economy and oil price.
- Corporate culture towards shareholders has improved, with a more constructive approach to pay-outs. Corporate fundamentals are also very attractive with a forward dividend yield of 9% and 5 – 6x earnings per share.
- Russia’s stock market is trading slightly below fair value on a CAPE basis.
Foreign investors have fled the Russia market since 2014, leaving it unloved and under-owned. Thus Russian equities have been traded at a discount compared with the global emerging market. As both the economy and the market continue to recover, Russian equities are likely to strengthen, supported by very low valuations and strong fundamentals.
We’ve outlined below some ways UK investors can gain access to the Russian equity market.
While we can see opportunities investing in Russia, it is not for the fainthearted. Risks still prevail and the tensions between Russia and the West are not likely to subside anytime soon. Anyone considering investing in the region should consider doing so only as a component of a well-diversified portfolio.
The following actively managed funds mainly invest in equities of companies that are domiciled, or do most of their business, in Russia:
Neptune Russia & Greater Russia Fund looks for ‘best in class’ stocks, primarily focusing on attractively valued companies that are run by management teams who are good allocators of capital, and on companies residing in sectors with strong growth prospects. It currently overweighs areas such as technology and communications sectors which the fund describes as “new Russia”.
Pictet Russian Equities Fund uses a combination of market fundamental analysis to select securities with significant value discounts and sustainable free cash flow generation. Stocks will be sold if the company’s manager plans to undertake a large capital expenditure programme. The managers have a value bias towards mid-caps. The fund’s investment strategy is also supported by Pictet global emerging equities sector specialists including a Senior Investment Manager who has a long history as an energy analyst. We'll be adding this fund to our platform shortly.
Company specific stocks
Investors can also access some companies that have core business in Russian whilst being listed in major western stock markets. While these stocks are not on any recommended list at The Share Centre, we have chosen them to highlight the fact that they are listed on the London Stock Exchange and accessible on our platform.
Petropavlovsk is listed on the London Stock Exchange and is a London-based gold mining company with operations in Russia. The group is primarily focused on the acquisition, exploration, development and production of precious metal deposits but also controls iron ore assets. Its principal operations are located in the Amur Region, in the Russian Far East, where it has operated since 1994.
Yandex, listed on the London Stock Exchange, is a Russian multinational corporation specialising in Internet-related products and services, including search and information services, eCommerce, transportation, navigation, mobile applications, and online advertising. It is the Russian equivalent of Google.
ETF and Investment Trust
While the following investments are not currently on a preferred list at The Share Centre, we have chosen them to highlight the fact of accessibility on our platform.
HSBC MSCI Russia Capped ETF aims to replicate the performance of the MSCI Russia Capped Index while minimising (as much as possible) the tracking error between the Fund’s performance and that of the Index.
Investment Trust JPM Russian Securities aims to maximise total return from a diversified portfolio of investments, primarily in quoted Russian securities or other companies which operate principally in Russia. It may also invest up to 10% of its gross assets in companies that operate or are located in former Soviet Union Republics.
If you're looking to purchase any of these investments and you're not currently a customer of The Share Centre, sign up today.
All information given including prices, yields and our opinion is correct at the time of publication. Our opinions on investments can change at any time and for our latest view please go to www.share.com. To understand how our Investment research team arrive at their views please read our Investment Research Policy.