No need to fear a new Cold War, Robin Geffen of Neptune says. Russia needs the West more than it admits. And a rise in net inflows to his fund shows that small investors may agree.
It was May in Moscow. I was with Robin Geffen of Neptune, his fund was booming, the oil price was at $135 and Goldman Sachs was forecasting that it would hit $200.
Fast forward three months, and the picture is so different. The unit price of Neptune Russia and Greater Russia has fallen by about a third from its peak. An act of Georgian aggression in South Ossetia has been met with an iron-fisted response from Russia.
Meanwhile, the BP-TNK battle provides almost daily evidence of Russia’s intentions towards foreign investors. Robert Dudley, its chief executive, was whisked from the country almost in the style of the Saigon evacuation, after months of bitter fighting with Russian shareholders and “sustained harassment” by the authorities.
Over summer, the Kremlin tightened its noose around the country’s energy and mining sector, imposing new limits on foreign investment in Russian companies that restrict non-Russians to no more than 5% of mineral exploration companies. It also launched anti-trust probes against London-listed Evraz Holding and Raspadsky Coal, while steel and coal giant Mechel saw its share price fall by half after the Federal Anti-monopoly Service (FAS) knocked on its doors.
But above all, the fall in the oil price has been as swift and brutal as its rise. The impact on the Moscow RTS stockmarket index has been painful; it peaked at 2487 in May as the price of crude galloped to new highs and now falls almost in line with every fall in the oil price. Last week it was trading at below 1530, down nearly 40%. The cynics who said that the Russia story was about oil and nothing else must feel vindicated. What’s more, some economists are predicting that oil will fall to $60-$70 a barrel, making the outlook for Russian equities grim.
Is it time to ditch Russia before it gets any worse? Geffen is not a man to be swayed by what has been dreadful news-flow. He says that Russian equities are at prices that are a steal. “We are now talking of a market with a 12-month forward P/E [price/earnings ratio] of 6.4. That puts it at almost the same level as when we launched the fund in 2004. Now is a great opportunity for investors who don’t have any allocation to Russia to get in.”
Neptune Russia has fallen less than the index because Geffen was never that keen on Russian oil stocks in the first place. The RTS index is about 65-70% oil and energy, but Geffen’s fund has only 22% exposure to the sector. “The fund has outperformed its peers quite sharply in this falling market as we only have limited exposure to oil,” he says.
Gazprom has fallen by half, putting paid to Putin’s hopes that it might one day become the world’s largest stockmarket-quoted company, and so have the other Russian oil giants.
Geffen has mixed views about the oil majors. On the one hand, he says they may have been oversold, but on the other hand he is not about to reduce his underweight position.
“Russian oil companies only receive $45 a barrel on their exports, so the fall in the crude price has no impact on them. The rest goes mostly into the government’s stabilisation fund. Okay, that fund will be receiving less revenue than it was, but it regarded the dramatic rises in the oil price as a bit of a windfall anyway. The lifting costs of oil in Russia are only $2-$3 a barrel, while transport adds a further $4-$5. Even the World Bank admits that Russia is about 85% immune to fluctuations in the oil price,” he says.
But Geffen is less interested in the oil price than in the behaviour of the Russian consumer. Neptune Russia’s portfolio remains heavily weighted towards consumer staples and consumer spending, whose enormous growth has been barely dented by the declining oil price.
“It’s likely that the out-turn for economic growth will be 7% for this year,” Geffen says, “and it looks like growth will be robust next year as well. Corporate results continue to look very good. Only last week, one of the major supermarket chains reported earnings well ahead of expectations. It’s a side of the stockmarket that is very robust.”
He dismisses concerns over the treatment of foreign and minority shareholders. “It’s important to recognise that Russians have themselves been as big buyers of Russian shares as foreigners. For example, Rosneft shares are widely owned by the man on the street. It’s a country in which domestic investors are the most common minority shareholders, and they are not going to be happy being discriminated against.”
On the wider scale, America and Europe are considering various economic punishments for Russia’s adventures in the Caucasus, including extreme options such as expelling the country from the G8. But Geffen says it is unlikely that Russia will rebuff the international community for long.
“It’s very important for Russia that it has easy access to the world’s credit markets. It has well-advanced plans to expand oil and gas exploration in places such as the Arctic and will need to access global capital markets if it wishes to do so. They are not going to shut off the door to foreign investors or minority shareholders.” Western fears that Russia may be returning to the days of the Iron Curtain are wide of the mark, according to Geffen. “The geo-political scene has shifted, but we are not going back to the Soviet days,” he says, as he flicks through the latest research from Barclays, which says that the sell-off in the Russian market is overdone and that investors should start topping up again.
Geffen argues that the likes of Russia and China have largely de-coupled economically from Europe and America, but that markets have not decoupled. He blames this in part on hedge fund activity, which leverages huge amounts of capital into directional plays.
Interestingly, in each of the past three months, Neptune Russia has enjoyed positive net inflows into the fund. Small investors are not baling out, and for the brave, buying now might bring substantial rewards over the longer term.