Are there bargain buys on the Russian front?

Hopes of a new Russia, one that was not just an oil play, were first dashed by the credit crunch. But Invesco Perpetual’s Liesbeth Rubinstein insists that a diversified economy is emerging.

Patrick Collinson 2012 byline 160

Fund managers like to talk about ‘news flow’ in their area, and for Liesbeth Rubinstein, manager of Invesco Perpetual Emerging European, it’s not good. Hardly a day goes by without a story about attempts by President Putin to silence his growing band of critics, who now include Angela Merkel. But Rubinstein is far from alarmed. The rising tide of concern about Russia’s direction is turning Moscow into one of the world’s best value stockmarkets.

The local RTS index, currently standing at the 1,380 level, is down by 20 per cent over the last nine months. It crashed from the 2,450 level in May 2008 down to 535 in January 2009, bounced back to 2,000 in March 2011 but has been weakening almost ever since. Given that Russia makes up 70 per cent of the fund, it’s impressive that over the past year Rubinstein has managed to protect investors’ cash.

She’s now convinced that stocks in Russia are at bargain levels. “The Russian discount to other emerging markets is around 40 per cent as a result of the run of negative headlines. It’s cheap, and it’s diversified – and it’s not all about natural resources.”

She acknowledges that the likes of Gazprom are dominant players on the Moscow stock exchange – and it’s 4.6 per cent of her current portfolio. Other oil companies such as Lukoil and Tatneft are also big holdings, while Novatek, a gas producer, and Uralkali, a potash producer, are in her top five. But she begs investors to look further down the index. “The companies in the oil, gas and mining sectors are in effect global commodity plays. What interests me about Russia is the domestic demand story. There is still a huge amount of catch-up to be done by local supermarkets, banks and even mobile phone companies before they reach the same level of penetration as in the West.”

Many of the midcap food and beverage companies, which are building strong domestic brands, are at huge discounts to their peers in the developed world, and also when compared with the other ‘Bric countries.

“Russia’s human capital, literacy rates, higher education standards, patent applications and so on are far ahead of the other Brics.”

But investors have heard this story before. Between 2006 and 2008 the RTS index soared, with people convinced that a new Russia was emerging. When the credit crunch struck and the price of crude fell, it turned out that Russia was indeed just an oil play. Yet Rubinstein insists that, behind the scenes, a more diversified and balanced economy is emerging.

“The engine of growth has moved from cyclical areas to consumption and investment,” she says. For example, if you look at the second quarter GDP figures, they were up 4 per cent year-on-year during a time when the oil price had fallen by 12 per cent.”

FS 1911 Collinson 450

While the Kremlin tightens its grip on public protests, it’s actually loosening its grip on foreign investors, she says. Russia finally joined the World Trade Organisation in August after 18 years of negotiations, and will now lower its import duties, limit its export duties and grant greater access to overseas companies. It hopes that foreign direct investment will rise to about 30 per cent of GDP.

Will they succeed? The country has a history of knee-jerk nationalism that will frighten foreign investors, burnt by the likes of Kirchner in Argentina expropriating Repsol. Anyone who has followed the BP-TNK saga will also be fearful of how foreign investors will be treated.

But Rubinstein says the Russian authorities are becoming more transparent about what they regard as crucial national interests, to be run by the state, and where they are happy for the private sector to control. “The state has made it clear what are the strategic and non-strategic assets. And it’s not in the consumer areas.”

Apart from food and beverage companies, Rubinstein is also building stakes in logistics companies as Russia, slowly, overhauls its tired infrastucture. House builders are another area where she sees huge potential.

It’s a very concentrated portfolio, with just 35 stocks but relatively low turnover. After Russia, Poland is her next most popular country holding, at 17 per cent of the portfolio. “Poland is also very cheap right now. It used to trade at a premium to the rest of Eastern Europe but now you can find a lot of well-managed companies at deep discounts. The yield on the market is above 5 per cent and we see decent companies with 9 per cent yields.”

Other parts of Eastern Europe and North Africa make up just a tiny part of the portfolio, although Rubinstein is a fan of Turkey. She sees it emerging as a global outsourcing hub and auto assembly specialist, citing the recent decision by Ford to switch production of Transit vans from Southampton to Kocaeli in Turkey.

But no matter how deep the discounts are in Russia and Eastern Europe, is the region now overshadowed by the wider problems in the European continent? “I think there’s a lot of work to be done about perceptions. There has been a remarkable role reversal, with the finances of western European governments worsening while the finances of Eastern Europe are looking more sound. That said, we need a resolution to the problems in the euro to move ahead. GDP forecasts have trended down, but I don’t see any major faultlines when it comes to external balances, and banking systems are now less vulnerable to external shocks.”

______

Patrick Collinson is the Guardian’s personal finance editor