Russia

By Mark Dampier | 31 Jul, 2008 

Recent falls in the Russian stock market have been put down to problems with Mechel, the steel company, and the continuing fight over TNK-BP. Russia is still an emerging market so problems with politics can still occur. However, that said, I do believe that the western press is really quite hostile to the Russian regime and we tend to get a very one sided view. The truth of the matter is that Russia needs western expertise because its oil production is falling rather than rising. It would clearly be better for the west to engage Russia in a more practical way. 

Politics aside, the Russian market had performed very strongly in the first few months of this year and I suppose at some stage profit taking, given the problems elsewhere in the world, was likely. On that basis, the Mechel and TNK-BP case has probably been an excuse more than anything else.

Oil prices have fallen and the RTS index of Russian shares is very dominated in oil and gas companies. These problems have occurred from time to time, the last well known case being Yukos in 2004, but perhaps it is worth remembering that since then the RTS index has climbed more than 274% (source: Jupiter).

Past performance should not be seen as an indication of future performance. The Russian economy is unlikely to be derailed with oil prices falling. Indeed if the oil price fell $70 to $80 the economy would still most likely grow very strongly. It is also worth noting that the middle classes which were virtually nonexistent ten years ago now account for 20% of the population and their rise is currently supported by very strong wage growth.

It is the domestic side of the Russian economy which both Neptune Russia and Greater Russia and Jupiter Emerging European Opportunities, the two Wealth 150 funds investing chiefly in this region are overweight in. I believe the stock market valuation is particularly attractive on a PE of 7.7 for 2008 earnings, 7.4 for 2009 earnings. As an example Lukoil trades on a PE of around 5.5 of its 2008 earnings, a very sharp discount to other emerging markets.

In conclusion we will have to monitor the Mechel problems and I think sentiment will remain relatively poor for the next two or three months. That said I have holdings in both Jupiter and Neptune funds and I believe I will be looking to add to these holdings over the next few months as I feel that investors should be rewarded over the long term.