Russian stocks are cheap for a reason

Russia’s volatile stocks have slid by 25% in three months. This is a buying opportunity, reckon some analysts. Elena Shaftan of Jupiter’s Emerging European Opportunities Fund says that the current state of the economy makes Russia a bargain. Strong domestic fixed investment and retail sales have underpinned growth of around 4% a year.

But two key factors determine the near- and medium-term stockmarket outlook in Russia, and both look bearish. One problem is navigating the country’s authoritarian and capricious political system. Many major international firms, notably Shell and BP, have managed to fall foul of the government.

Since Vladimir Putin was re-elected in March, “even Russian oligarchs and businessmen have started to become nervous about Putin”, says John Hatherly of Seven Investment Management. A recent crackdown on opposition leaders has fuelled fears of an increasingly dictatorial line.

Investors in Russia tend to tune out the politics in the good times, but they rapidly rediscover their fears when the external environment darkens. “When everything gets worse, investors remember all the political stuff and a vicious selling cycle starts,” says Sergey Dergachev of Union Investment Privatfonds. Like all emerging markets, Russia is especially vulnerable to the dwindling in risk appetite caused by the euro crisis. A main problem is its oil dependency.

The oil and gas sector is Russia’s key source of income, and its energy firms are stockmarket heavyweights. Unfortunately, the “path of least resistance” for oil prices, already down by a fifth from their peak, is still down, says Morgan Stanley.

Europe and China are weakening, while the American recovery is lacklustre. Moreover, inventories are growing. Even factoring in a further drop in Iranian exports, there is plenty of oil around.

This implies dwindling momentum in the economy, especially as Russia has become ever more dependent on oil in recent years. Four years ago the budget balanced at $55 a barrel; now the figure is $120, says Capital Economics. Strip out oil and the budget deficit is a whopping 12.5% of GDP. The government has promised structural reforms to lessen oil dependency, but it regularly does this and has yet to follow through. The Russian market looks set to get even cheaper over the next few months.


Claim 12 issues of MoneyWeek (plus much more) for just £12!

Let MoneyWeek show you how to profit, whatever the outcome of the upcoming general election.

Start your no-obligation trial today and get up to speed on:

  • The latest shifts in the economy…
  • The ongoing Brexit negotiations…
  • The new tax rules…
  • Trump’s protectionist policies…

Plus lots more.

We’ll show you what it all means for your money.

Plus, the moment you begin your trial, we’ll rush you over THREE free investment reports:

‘How to escape the most hated tax in Britain’: Inheritance tax hits many unsuspecting families. Our report tells how to pass on up to £2m of your money to your family without the taxman getting a look in.

‘How to profit from a Trump presidency’: The election of Donald Trump was a watershed moment for the US economy. This report details the sectors our analysts think will boom from Trump’s premiership, and gives specific investments you can buy to profit.

‘Best shares to watch in 2017’: Includes the transcript from our roundtable panel of investment professionals – and 12 tips they’re currently tipping. The report also analyses key assets, including property, oil and the countries whose stock markets currently offer the most value.