Russia is corrupt. It’s run for politicians and oligarchs, not shareholders. Oh, and it’s too dependent on oil and gas. That pretty much sums up why investors don’t like Russia. And it’s all perfectly logical.
Worried about energy dependence? You should be. The Russian stock market tanked by 80% in 2009 as oil and gas prices tumbled. As for corruption and political interference – there’s no shortage of examples of that.
BP seems to make a habit of irritating superpowers, as the current US debacle shows. But it’s had its ups and downs in Russia too. Robert Dudley, the former head of its Russian joint venture, TNK-BP, was effectively exiled from the country in 2008, after a spat with the group’s Russian shareholders. If the UK’s biggest company can be bullied by a few oligarchs, what hope do small shareholders have?
And then there was Gazprom’s decision to provide Ukraine with gas at a 30% discount in exchange for a Russian naval base. That wouldn’t have pleased me if I were an investor in the company.
So Western investors have good reason to be wary of Russia.
Russia is hardly the only emerging market with these problems. Investors who say they wouldn’t touch the country with a ten-foot bargepole are merrily chucking money at China, which has exactly the same problems with corruption and politics.
Foreign firms operating in China are far more likely to be investigated for regulatory breaches than local peers. It’s no coincidence that recent labour disputes have occurred at international companies rather than Chinese ones. And acquisitions of Chinese energy and commodity firms are often driven by national interest rather than a desire to create value for shareholders.
The fact is that emerging markets are risky. That’s their nature. And with higher risk, comes the potential for higher returns. And right now, I reckon Russia offers a much better bet than China. While everyone has been chasing the Chinese consumer story, Russia has been ignored. That makes it a cheap play on emerging market growth.
Even though the Chinese stock market is down by 15% since January, the average listed company still trades at 2.5 times net asset value. Brazil is not much better with a multiple of 2.3. In Russia, markets are only trading at 1.3 times book value.
Meanwhile, Russian-listed companies trade on an average p/e ratio of just over seven, compared to China and Brazil on multiples of 15 and 13 respectively (although my colleague David Stevenson makes a strong case for investing in Brazil here: Don’t buy US stocks – Brazil is a much better bet).
Why so cheap? Well, there’s that reliance on oil and gas to worry about. But Russia is not quite as dependent on hydrocarbons as you might think. Energy, in all its forms, only accounts for around 18% of Russian GDP, although it makes up the lion’s share – 61% – of exports. And Russia is a big player in other areas. It has moved from being an importer of wheat to the world’s second largest exporter.
And there’s a massive opportunity in replacing Russia’s creaking infrastructure. As Simon Caufield points out in his True Value newsletter: “While China has built 25,000 miles of highways since 1988, Russia has only laid the tarmac on a few hundred.”
But the most telling statistic is that between 2000 and 2008 the Russian middle class grew from 4% to 24%. This upward mobility has fuelled, and will continue to fuel, domestic demand. The Russian consumer is just as attractive an investment story as the Chinese consumer – and nowhere near as hyped. In fact, Simon reckons Russia is “the one emerging market you need to invest in now.” And in this week’s MoneyWeek magazine – out tomorrow – we spotlight one Russia-focused fund which has proved very profitable for its investors. If you’re not already a subscriber, subscribe to MoneyWeek magazine.
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