View more on these topics

Russia gusher

Russia’s performance is influenced by its oil companies and the market will bounce back after some volatility

In investment terms, Russia has famously been described as Saudi Arabia with snow. That is, of course, a considerable oversimplification but the importance of the oil and gas sector to the Russian economy and market is undeniable.

Gazprom alone accounts for almost 44 per cent of the Russia equity market, as represented by the Russia ROS index. It is Russia’s biggest company, supplying almost all the gas needs of Central Europe, Eastern Europe and the former Soviet Union. Factor in Lukoil and Surgutneft, the nation’s second and third-biggest oil producers respectively, and those three stocks alone represent almost three-quarters of the value of the Russia equity market by capitalisation.

Clearly, no matter how well the other 27 companies in the ROS index do, the overall performance of the Russian equity market tends to be heavily influenced by the performance of these three very big oil and gas companies. In turn, the profitability and share price performance of these companies depends to at least some extent on prevailing commodity prices.

Given the near-quadrupling of the oil price since 2001, it should be no surprise to see the remarkable performance of the Russian equity market over the past five years. The Russia ROS index has returned a cumulative 557 per cent in US dollar terms over that period compared with 138 per cent from the MSCI Emerging Markets index and just 19 per cent from the MSCI World index, both in US dollar terms.

It is not just an oil and gas story, though. Russia is also one of the world’s biggest producers of nickel, copper and iron as well as precious metals such as platinum and has benefited from strong demand from Asia and from China in particular in recent years. With such a rich resource base, many investors view exposure to the Russian equity market as a good way of participating in both global growth and Chinese demand for commodities.

Given the strength of world equity markets and of the Russian equity market in particular in the early months of this year, some volatility was to be expected and so the weakness experienced in May and again in June was not wholly surprising. But the extent of the correction was unexpected and certainly did not reflect the strong fundamentals that continue to underpin the Russian equity market.

We believe these favourable fundamentals are largely intact and that the recent sharp fall has been more a result of external global factors than a deteriorating economic environment. Gross domestic product grew faster than expected in the first quarter of the year at an annual rate of 5.5 per cent in spite of the very cold winter. Meanwhile, industrial production growth was an impressive 10.6 per cent on May compared with a year earlier while investment rose by 14.2 per cent over the same period.

We believe the Russian market should stabilise and show strength again once investors have a clearer picture of the US interest rate cycle and global liquidity conditions in general. Energy prices have remained high and we do not think the commodity cycle is over yet.

We are particularly upbeat on the prospects for the energy sector within Russia, favouring Lukoil for the potential we believe the company has for exceeding earnings estimates and the attractive valuations the company is trading on.

There is, of course, also more to the Russian market than the very biggest oil producers and we have been finding investment opportunities among a number of banks in the financial sector and also in a number of companies operating in the consumer discretionary sector.

Within the banking sector, we particularly like Sberbank, for example. It is the biggest bank in Central and Eastern Europe and a key beneficiary of Russia’s economic growth.

Ghadir Abu Leil-Cooper is head of emerging European equities at Baring Asset Management


F&C hires Coles for global equities team

F&C has appointed Terry Coles as alternate manager to Sophie Horsfall for its international funds.Coles joins from Morgan Stanley Asset Management where he was most recently junior portfolio manager for global equity in its private wealth management business.Director of global equities and fund manager of the F&C stewardship international fund Sophie Horsfall said: ” Terry […]

GHL links with Key for equity release

Key Retirement Solutions has agreed to take equity-release referrals from the GHL Group. Last week, the FSA called for advisers that do small amounts of business to pass leads to specialist firms or quit the market.

Ship members write £262m business

Safe Home Income Plan members wrote £262.8m worth of equity-release business in the second quarter, a fall of 5.8 per cent on Q1 but 0.75 per cent up on Q2 2005.

Raising Standards leader leaves ABI

The director of the Association of British Insurers’ Raising Standards initiative, Martin Shaw, has left the organisation. Director of consumer strategy George Hodgson is heading the customer impact scheme, which has replaced Raising Standards. Shaw is now a freelance consultant.

Tapering of annual allowance – adjusted and threshold income

The definitions of adjusted income and threshold income used to determine whether, and to what extent, someone’s annual allowance will be reduced can be confusing.  Here we try to make sense of it all. The annual allowance will be reduced for high income individuals from 6 April 2016.  Our previous article Tapering of annual allowance […]


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm