Those waiting for an opportunistic moment to buy into Russian equities may be a little late: the real bargains have already gone.
“On the equity side, people do see value in Russia now,” said Charles Robertson, chief economist at Renaissance Capital. “They already stepped in after Crimea: the market has risen since then, and it has been quite a good call.”
Robertson said he was seeing less interest in Russian debt but added that despite the considerable outflows from Russia — as much as $60bn in the first quarter according to Russia’s finance ministry — contrarian investors had been looking closely at its stock market.
Having taken a rather dim view of the market in the past, Matthew Vaight, manager of the M&G Global Emerging Markets fund, has been increasing his exposure to Russia.
“We have been distrustful historically [of Russia] for a combination of extreme valuations in the handful of well managed companies compared to the core corporate governance in the state owned enterprises,” he said. “What we have seen recently is the Russian market has moved down dramatically at all levels of that market, so some of those better managed businesses are now screening up as being attractive.”
Vaight said his team was now “doing more work on Russia than we have done before”, adding: “We have to follow that value signal and that ratio is telling us to look at the Russian market today.”
Analysts admitted Russia would bring occasional opportunity. “We have repeated the governance related reasons not to invest in Russia at tedious length in the past,” said John-Paul Smith, a strategist at Deutsche Bank.
“But while the market is fundamentally uninvestable for non-dedicated investors, equities are locked in a very volatile trading range which will, from time to time, give rise to contrarian buying opportunities.”
One other issue is that such is Russia’s weight in MSCI indices, many fund managers do not have the option of leaving it completely. “You can’t just exclude Russia,” said Vadim Khramov, economist at Bank of America Merrill Lynch.
“Surveys tell us that people were on average overweight Russia relative to the index before the crisis, and a little bit underweight now, but it is a substantial part of the emerging markets index. It’s also relatively high yield, so investors have to buy Russia to keep up with the index.”
This is the case for Fidelity Emerging Market fund manager Nick Price, who has reduced exposure to Russia from 7% at the start of the year to 3.2% as at the end of March.
But he added: “This is not necessarily a result of any views on the Ukraine situation, but rather it is based on stock specific decisions.”
Price owns oil and gas firm Surgutneftgaz and Sberbank, which both offer attractive valuations and offer an enticing dividend yield while having “little or no exposure to the Ukraine crisis”.
When investors do return, where should they go? One strategy is the so-called “new Russia” stocks, such as those in the IT and high technology sectors, which should benefit from high literacy and education in Russia, as well as cellphone and internet penetration.