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.

MoneyWeek magazine

Latest issue:

Magazine cover
Don't panic!

The Greek vote is a great opportunity to buy Europe

The UK's best-selling financial magazine. Take a FREE trial today.
Claim 4 FREE Issues

Paul Hodges: house prices could fall 50% in 'Great Unwinding'

Merryn Somerset Webb interviews Paul Hodges about deflation, the global economy's 'Great Unwinding', and how Britain's house prices could halve.

Which investment platform?

When it comes to buying shares and funds, there are several investment platforms and brokers to choose from. They all offer various fee structures to suit individual investing habits.
Find out which one is best for you.

29 January 1886: Karl Benz patents the motor car

On this day in 1886 Karl Benz patented his Benz Patent-Motorwagen, with a new and revolutionary power source – the internal combustion engine.