It might be risky but Russia is too good to ignore

published 31 October 2005

Investors have "fallen back in love" with Russian stocks, says Daniel Eckert in Die Welt. The dollar-denominated Russian Traded index of blue-chip stocks has rebounded by over 30% since sentiment soured in October following the arrest of Yukos boss Mikhail Khodorkovsky, which fuelled fears that the government was tightening its grip on public companies. Even after last week's terrorist attack on the Moscow tube, stocks barely paused for breath on their way back to their pre-Yukos record high of 650. The index has now risen sixfold since its inception in 1995.

You can see why investors have decided that, despite the risks, Russia is too good to ignore, says Jenne Mannion in The Independent. GDP growth is tipped to reach 6% this year, and ongoing reforms, notably simplified taxation, are boosting confidence. And political instability may now be less of a factor since president Vladimir Putin is almost certain to be re-elected in March and will subsequently be supported by a majority of the parliament; this should herald another round of reforms. Russia's credit upgrade to investment status last autumn, and the likelihood of oil and gas prices staying high, has also helped, said Frankfurter Allgemeine Zeitung - this sector makes up 70% of the market.

Given these prospects, plus a "reasonable" average p/e of 11.7, the market looks set fair, says Eckert. So which firms look most enticing? Steffen Gruschka, manager of the DWS fund, is "especially keen" on oil and gas giant Gazprom, which would be given a boost by a post-election liberalisation of the gas market, while cash-rich oil group Transneft is undervalued at four times earnings. Also worth a look are Mobile Telesystems and Vimpelcom, which are in line for "soaring profit growth" as prime beneficiaries of Russia's mobile-phone boom.