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Is Russia on the rebound?

A recent rally in the Russian stock-market has led some managers to claim that now is the time to start investing in Russia but is there still too much risk in the market?

After the re-election of Vladimir Putin on March 3, the Russian stockmarket rallied but there have since been dips which could signal that the market is not recovering from the depressed levels it is currently trading at.

HSBC Global Asset Management global strategist Philip Poole has an overweight position in Russia, with 30 per cent invested in Russian companies, in his £786m HSBC GIF Bric equity fund.

He says the retracement on gains following the election is not just attributable to the political instability after Putin’s victory, which saw opposition activists protest that the election was marred by fraud.

Poole says: “Russian markets fell on March 5 but that was in part due to a global market correction that happened because China downgraded its growth and there were fears about Greek swap debt. Russia is not immune from that as a high-beta market and so it will move in tandem with other markets that sell off when there is risk aversion.

“The Russian market has started to re-rate. I think some, if not all, of the recent political uncertainty will ease following the election. I see the protests as likely to lead to reform.”

Poole says volatility in the Russian market should not deter investors.

He says: “Russia is perceived as a higher-risk market and so it is susceptible to big swings but Russia was the cheapest market compared with other emerging markets last year.”

Jupiter head of emerging Europe Elena Shaftan (pictured) says she is more optimistic about the Russian market this year. She has added 7 per cent to Russian equities in the £368m Jupiter Emerging European opportunities fund, moving from a 4 per cent overweight in Russia at the end of last year to an 11 per cent overweight position.

She says: “Since the beginning of the year, our confidence in the Russian market has grown. The economy is accelerating, driven by household consumption and investment, while inflation and unemployment are sharply down.”

Shaftan says risk aversion in global markets has abated this year and valuations are at historically depressed levels with a great deal of pessimism already priced in.

She says: “The lack of appetite for Russia last year was illustrated by the spectacular breakdown of the direct correlation between the Russian equity market and the oil price. While oil increased by 20 per cent, the Russian market actually fell by around the same amount.”

Oil price has historically been correlated with the performance of the Russian stockmarket, as Russia is a big producer and exporter of oil.

Following this shift, Shaftan has been adding to Russian oil pump company HMS in the Jupiter Emerging European opportunities fund.

She says: “Like many smaller companies, it has been ignored by the market in recent months, yet the company enjoys high margins thanks to its dominant position in its home market, where Russia’s idiosyncratic technological standards present powerful barriers to entry.”

Shaftan says once risk appetite normalises, this is exactly the kind of highquality small-cap growth stock that investors are likely to favour.

She adds: “With the company trading on a price to earnings multiple of five times with a 4.5 per cent dividend yield, the potential for a re-rating is significant.”

Aberdeen Asset Management emerging market fund manager Viktor Szabo says Russia has been relying too heavily on ever increasing commodity prices. He says: “The government has depended on this characteristic for too long to dictate fiscal policy and any reversal of this trend would have severe repercussions for the country’s growth prospects.”

He adds that the upturn in Russian equities is not sustainable, as Russia is still facing political instability.

He says: “While Putin and his followers are celebrating the start of his new presidential term, the voices claiming political fraud are being heard loudly and protests challenging the authority of his leadership continue. If political uncertainty spreads throughout the middle classes then we are likely to see further volatility in the stock-market which could be played out over months rather than weeks.”

Rowan Dartington head of collectives Tim Cockerill agrees that reinvestment is an issue for companies in Russia. Cockerill says the government can influence where some companies invest profit, such as oil companies, which may not always be in the interest of shareholders.

He adds: “In terms of companies to invest in, quality of management is key, alongside with being wary of cross business holdings, where directors take money out of one company to fund another.”

He concludes that Russia funds are suitable for the highest-risk investor, as are Emerging Europe funds which are usually heavily weighted towards Russia.

Bestinvest senior investment adviser Adrian Lowcock says: “If investors are looking to specifically increase their Russian exposure, then we prefer Emerging European over pure Russian funds. This allows investors to access Russia but also the fund manager can decide when and how to alter their exposure to the region and is not restricted to investing in just one country.”

Lowcock also points out that Emerging European funds are currently dominated by Russia exposure, so Bestinvest would recommend this approach as secondary to a core global emerging markets fund.

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