It is hard to think of a more contrarian investment than Russia. Not only is President Vladimir Putin the bête noir of Western governments, but hydrocarbons account for 40% of the market. As a result, Russia, according to Priyesh Parmar of Numis Securities, “is the cheapest major global equity market, trading on a historic price/earnings ratio of just 9.5 and offering a yield of around 5%”. The only investment trust specialising in Russia, the £300m JPMorgan Russian Securities (LSE: JRS), is on a 12% discount to net asset value (NAV) and yields 4.6%.
Its manager, Oleg Biryulyov, is upbeat. His portfolio has a 72% overlap with the benchmark index and is priced, he says, on 7.9 times forward earnings and a price/book ratio of 1.2. The forward dividend yield is 7.6%, yet annual earnings growth is expected to average over 7% in the next five years. The state’s budget is based on a $40-per-barrel oil price so, with a price above $60, finances are healthy. He does not expect political change nor any shift in the regime of Western sanctions. “The market is [at] its historic high but is still very cheap.”
MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
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
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Governance has improved
Biryulyov says that “the correlation of the Russian market to commodities is declining”, but it is clearly still significant. “A poor environmental profile is inevitable,” but he seeks to compensate through a focus on sound corporate governance. For example, Gazprom, the largest holding at 15% of the portfolio, was “uninvestable” a few years ago. Since then, improved capital allocation and a shift from being run as a nationalised to a commercial company has boosted cash generation and led to a likely rise in dividends from 40% to 50% of earnings.
Tom Holland of Gavekal Research points out that “if all the world’s cars were to go electric tomorrow, all oil-fired power stations were decommissioned and all oil-fired boilers... scrapped, the world would still need 66 million barrels of oil per day[mbpd] – two-thirds of 2019’s demand – to propel its trucks, ships and planes, and to feed its industries”. Oil (and gas) will not fade into irrelevance for decades, yet Western firms are running away. Russia looks the best place for investors to benefit from the cash generation of a declining industry.
Balancing growth and value
JRS also has large holdings in Lukoil and Rosneft, and in miners, with Norilsk Nickel worth 11% of the portfolio. Two steel producers account for 6% and total commodity exposure is nearly 60%. With giant bank Sberbank comprising 13%, this implies a value style but Biryulyov has deftly switched between value and growth. In 2020, growth companies Yandex (Russia’s Google), EPAM (a Belarussian IT outsourcer), and Detsky (a children’s retailer), were the best performers.
The market is extremely volatile. The trust’s NAV fell by 46% in 2014 but rose by 45% in 2019. This year has started well but there should be far more to go for. Thereafter, who knows? Russia’s domination by Mafia-style oligarchs does not encourage entrepreneurs – hence its modest rate of economic growth. Capital that could be invested at home leaves the country so the small and midcap segment of the market is undeveloped. That may change in time to make JRS a great long term investment but, for now, investors can focus on the shorter term.
-
What is the 25x retirement rule and does it work?The 25x retirement rule has been around for decades but many experts question if it is a suitable strategy
-
When is the self-assessment tax return deadline?If you are self-employed, rent out a property or earn income from savings or investments, you may need to complete a self-assessment tax return. We run through the deadlines you need to know about
-
Are wealthy whisky enthusiasts leaving Britain?Collectables Wealthy whisky enthusiasts are heading to tax-friendly countries such as Dubai, where there is more disposable income to spend on collectable luxuries like rare whisky.
-
'The rise and fall of Kodak is a lesson for the tech giants'Opinion The long decline of Kodak – a once-dominant company – shows why no business is safe from disruption, says Matthew Lynn
-
8 of the best properties for sale with kitchen gardensThe best properties for sale with kitchen gardens – from a 17th-century timber-framed hall house in Norfolk, to an Arts & Crafts house in West Sussex designed by Charles Voysey with a garden by Gertrude Jekyll
-
Why investors can no longer trust traditional statistical indicatorsOpinion The statistical indicators and data investors have relied on for decades are no longer fit for purpose. It's time to move on, says Helen Thomas
-
Investors rediscover the virtue of value investing over growthGrowth investing, betting on rapidly expanding companies, has proved successful since 2008. But now the other main investment style seems to be coming back into fashion.
-
8 of the best properties for sale with shooting estatesThe best properties for sale with shooting estates – from an estate in a designated Dark Sky area in Ayrshire, Scotland, to a hunting estate in Tuscany with a wild boar, mouflon, deer and hare shoot
-
The most likely outcome of the AI boom is a big fallOpinion Like the dotcom boom of the late 1990s, AI is not paying off – despite huge investments being made in the hope of creating AI-based wealth
-
What we can learn from Britain’s "Dashing Dozen" stocksStocks that consistently outperform the market are clearly doing something right. What can we learn from the UK's top performers and which ones are still buys?
