The rush to invest in Russia

published 13 October 2017

866_MW_P06_Bottom — Investors are joining the Russian party

Russia has been out of fashion among global investors for several years. The longest recession this century, caused by the collapse in oil prices in 2014 and exacerbated by US and EU sanctions, badly dented its appeal. But things are looking up. As Steve Johnson points out in the Financial Times, Russia is now the largest overweight position in the average emerging-market fund, which holds 1.46% more Russian stocks in its portfolio than the benchmark MSCI Emerging Markets index.

Why the turnaround? It's partly because the previous emphasis on long-standing favourite India looks overdone. In Russia, by contrast, stocks are cheap and the economy is slowly recovering; in the second quarter, year-on-year GDP growth reached 2.5%, a three-year high. Consumers, shell-shocked by a protracted squeeze on real wages amid a slide in the rouble, have regained some confidence. In the oil sector, companies have been forced to develop their own drilling technology as sanctions thwarted access to foreign expertise. Some domestic firms such as cheesemakers have been boosted by the absence of imported competition, thanks to Russian counter-sanctions. Corporate profits have started to climb after a long decline, says Johnson.

But the rush to Russia may be more of a fad than a new trend. The economy has already reached what the central bank considers to be its likely speed limit, says Olga Tanas on Bloomberg. The oil-rich years were a good chance to implement structural reforms in order to bolster long-term growth, but they were squandered. "From weak institutions to a poor business climate, the choke points" holding Russia back are well known, but constantly ignored.

MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter