Russian Investment Opportunities

Friday, 05 December 2008 15:36

Russian Investment Opportunities

Russia on the Rebound

A new report predicts the economies of Eastern Europe and the former Soviet Union are set to grow by 5 per cent this year. Michael Wilson looks at the underlying trends in emerging markets, but cautions against heavy investment in the sectorYou could be forgiven for thinking that this is an almost wilfully wrong-headed moment to go back into emerging markets. The US is teetering on the brink of who knows what kind of economic crisis after its bungled election in mid-November. The euro is in crisis and nobody seems to know how to correct it. Japan is openly failing to convince even its most faithful friends that it can handle its debts and even its bond markets are looking shaky.

Russian Investment Opportunities - Political Crisis

So why, you ask, would anybody in their right mind want to gamble their money on high-risk economies right now? Surely history has taught us that times of major political crisis always send investors scurrying away from emerging equity markets and back to the dollar markets that they know and trust? And if that doesn’t work, to bonds or even cash? Anything, in fact, except third-world equity?

Good questions, all of them. Yet this autumn, the sounds of returning confidence have been unmistakable. One after another, senior investment managers have been voicing their conviction that it might soon be time to buy again. Only a couple of months ago, the Baillie Gifford Emerging Markets Growth Fund let it be known that it was looking for investment opportunities in Russia for the first time, because the economic environment was improving so rapidly. Others have been saying some distinctly daring things about Latin America. How much lower can such a fundamentally healthy region go, they ask, before the upside potential becomes completely overwhelming?

Russian Investment Opportunities & The Russia Enthusiasts

The Russia enthusiasts have the most explaining to do, because Russia is in a very weird situation indeed at the moment. The rouble is holding almost alarmingly steady at the moment, despite the fact that Russia’s domestic inflation is still roaring ahead by around 20 per cent a year (and those are two things that you hardly ever see written in the same sentence). The overall Russian economy is moving ahead by 7 per cent a year, industrial output is rising by 8-9 per cent and Moscow’s foreign trade is running a US$55 billion surplus, largely thanks to the oil price boom. But you’ll search in vain for any good news on the Moscow Stock Exchange: the main index has put on just 5 per cent in the last twelve months, or 4 per cent in dollar terms. Of the 24 offshore funds listed by Standard & Poor’s in its Russian Equity section, only six made a capital gain in the six months to November 2000 and the average loss was 10.8 per cent.

So why are some fund managers talking about going back into Russia? It depends who you listen to. On the positive side, the optimists can point to the fact that President Vladimir Putin seems to be making a fairly good job of controlling the domestic political situation: he’s pursuing his political adversaries, including especially the corrupt ‘oligarchs’ who enriched themselves under his predecessor Boris Yeltsin. They can also remind you that the oil bonanza is doing the national debt a power of good and that factories are working flat out to fulfil domestic demands.

Russian Investment Opportunities - Russia's Oil Boom

But on the negative side there are plenty of people who’ll remind you that Russia’s oil boom might disappear as quickly as it arrived; that hardly any of the oil money is actually reaching the Russian people anyway (because it’s all being siphoned off by the International Monetary Fund to repay Russia’s horrific foreign liabilities); and that Russia’s factories will only stay working at full capacity for as long as there is a shortage of foreign currency with which to buy the imported goods that the people really crave. They’ll also tell you that Russia’s entrepreneurs are finding it impossible to get capital for growing their businesses because the bank rate is at 25 per cent to support the rouble.

Not much sign of a booming economic prospect there then.
So where are the opportunities coming from? If you ask the handful of managers who have made sizeable gains this year (Brunswick Russian Directional, 33 per cent, Brunswick Russian Emerging Equity Trust, 35 per cent, F&C Russian Investment, 42 per cent, IIG Global Markets, 38 per cent), you’re likely to find that their answers revolve around very careful stock-picking indeed.

Russian Investment Opportunities - Restructuring

The restructuring of Russia’s monolithic power, telecommunications and energy networks is still throwing up strong opportunities for fund managers who really know their way around. And every capital-hungry company that thinks it might stand a chance of getting foreign cash (in preference to the expensive domestic kind) is offering highly attractive equity terms to any prospective partner who has the stomach for what might turn out to be a very turbulent ride.

For more relevant news items and magazine articles please click the links below:

Article: The Rise of Sovereign Wealth

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