Russia: good things happen to cheap stocks

Russia may be a basket case, but stocks this cheap shouldn’t be ignored, says Merryn Somerset Webb.

There hasn't been much to be gained in the last year or so from suggesting that anyone invest in Russia. Not only has it not worked out yet (the investment trust I suggested last year is down 24% sincebut it has also started to make people very, very angry see the comments under my most recent column in the FT.

So I was pleased that Simon Milne of Aubrey Capital pointed out to me that I am not the only one who still thinks it is worth looking at.

At this year's Sohn Conference in New York (there'll be a UK version on 19 November) James Grant, editor of Grant's Interest Rate Observer, had a few things to say on one of the world's most hated companies Gazprom.

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It is, he says, the "worst managed company on the planet," something that should come as no surprise given that it is run by the "worst kleptocrats ever assembled on one planet". However it is also true to say that it's "many imperfections" are priced in, and that very often "good things happen to cheap stocks".

What kind of good things? The first thing to note is that Gazprom isn't all bad right now. It is massive company (revenues of $150bn) and even with the horrible management it makes a lot of money and has a "terrifically solid balance sheet." And from here it could raise the dividend, supply more gas to China or perhaps stop investing in low payoff capital expenditures (see a list here).

His view is that solvent companies just don't trade on price/earnings ratiosof 2.5 times and yield 5% for very long. So regardless of the political climate it makes sense to buy them when they do (as long as you have a flexible timeframe of course).

As for the rest of the market, it makes sense to price in a degree of political risk, of course (although Grant insists that "this too shall pass"). But Russia expert Liam Halligan points out that the market now trades on a similar valuation to that of the 1990s. Back then, the country was massively indebted, had no reserves, and was working with an oil price of around $25. Today it has no net debts and has the third largest reserves in the world. And the oil price has quadrupled.

I know it isn't a conventional or a popular position, but I am keeping my (still smallish) Russian holding.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.