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Russian positives

I suspect the recent publicity and jailing for a further six years of former billionaire Mikhail Khodorkovsky reinforces many people’s attitude to Russia. Most investors will be old enough to remember the Cold War too, which does not help. There is little doubt that Russia has a poor image and this is probably why the stockmarket is one of the most lowly rated among the emerging markets, with an average price to earnings ratio of around seven or eight times.

However, in a recent meeting with Elena Shaftan, who runs Jupiter Eastern European opportunities fund, she reminded me of the many positives about Russia. She also pointed out that she does not run a pure Russian fund but one that invests in the whole region which includes 25 countries. These range from mature markets, such as the Czech Republic, to less devel-oped Turkey and even Israel, a very different market with low correlation with other Eastern European countries.

That said, she still has around 60 per cent per cent invested in Russia. Elena explained to me that the Russians are realising they need foreign capital in order to privatise around $166bn of companies and this has led to a U-turn on Putin’s stance towards foreign investment, which she sees as very positive for the market overall.

The actions of Dmitry Medvedev, the current prime minister, have also been important in driving out corruption, so Shaftan believes there is a lot going on under the surface that we do not see in the news.

Of course, the Russian stockmarket is still significantly influenced by commodities, particularly the oil price, and while this remains comfortably above $60 a barrel the Russian economy looks in good shape. I should further explain that although the price to earnings ratio of the market looks cheap, it is partly because many of the energy companies, including Gazprom, are extremely lowly rated.

In contrast, many of the domestic companies in Russia trade on much higher multiples although this has not dampened interest from foreign firms. The recent takeover of Wimm-Bill-Dann, a major dairy and beverage producer, by Pepsi clearly shows that Russia is not out of bounds for multinational companies.

Shaftan also likes Poland at present, a big market primarily driven by domestic demand. It has the thirdbiggest population in Eastern Europe and is more developed than many of its neighbours. Poland had its credit crisis in early 2000 and has more or less put its house in order since, with consumer spending remaining robust.

Another country she favours is Turkey, which was one of the best-performing markets of 2010. The country has attracted plenty of new foreign investment, with an economy growing at 7-8 per cent a year and little domestic borrowing. This lack of leverage is attractive and Turkish banks look healthy and well placed to service the growing economy. Turkey is also still the second-cheapest market in the region after Russia, so the investment case remains very much intact.

This fund is clearly not for widows and orphans as Eastern European markets can be highly volatile. Nonetheless, I feel the long-term story of economic growth in these emerging economies has been rather forgotten . It is a region with well educa-ted populations keen to cast off the Communist past and underpinned by an important manufacturing base.

Many firms are benefiting from the trend of outsourcing by Western European companies taking advantage of a good standard of education and fast delivery times.
Finally, unless the world can find a genuine replacement for oil in the very near future, I find it hard to believe that the long-term future for the oil price is not upwards and this should bode well too for the Russian economy.

When investing in the region, you need to know who you can trust. An exper-ienced fund manager such as Shaftan is important. For those who can take the inevitable volatility, the fund is a definite buy for the long term.

Mark Dampier is head of research at Hargreaves Lansdown

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