Russian bourses sell-off spurs hunt for bargains

Employees work in the reception area at the Micex-RTS Moscow Exchange, Russia’s benchmark stock index, in Moscow. Foreigners dumped the country’s stocks, bonds and the rouble following Russia’s invasion of Crimea.

Reuters/New York

Rising tension between Russia and the West has rattled the country’s stock and bond markets, but some big money managers see the turbulence as an opportunity.

Russia’s equity market has plummeted 18% so far this year. Foreigners dumped the country’s stocks, bonds and the rouble following the early March invasion of Crimea, a territory of Ukraine. It now faces economic sanctions that could worsen if the crisis escalates.

Investors have reacted with their feet. The rouble is down nearly 9% on the year, and investors have pulled about $4.4bn from stocks and $4.1bn from bonds between September 2013 to the middle of March, according to the latest data from EPFR Global.

“Russia’s stock market right now is one of the cheapest in the world, and probably one of the most hated,” said investor and commodities guru Jim Rogers, chairman of Rogers Holdings, in Singapore. “This is the time to buy Russia.”

Those betting on Russia now should have a long-term horizon. After citizens in the Crimean peninsula voted for annexation by Russia, the US and European Union reacted by issuing sanctions that, while limited in scope, could be broadened. Russia’s economy has weakened as inflation has risen and investments have stalled. IMF data shows the country’s reserve assets declined to $493.3bn in February from $509.6bn in December as it has defended its currency. The central bank raised interest rates by 1.5 percentage points to stem the rouble’s fall.

Rogers, who has been investing in Russia for the last 1-1/2 years, said he bought Russian stocks last week. He said if more sanctions are imposed and the equities market declines further, there would be more buying opportunities in Russia.

Rogers said he is looking for non-energy companies – a tall order considering the RTS Index of 51 leading Russian companies is heavily skewed toward energy (58% of the index) and basic materials (13%). Estimates from emerging and frontier market specialists FMG Funds, based in Malta, show that Russian stocks are trading at a price-earnings multiple of about four times 2014 earnings, with an annual dividend yield of 5%.

By comparison, the US trades with a P/E ratio of nearly 16 times earnings and a dividend yield of just 2%, FMG data show. FMG, which has $150mn in emerging and frontier market assets, is looking to scoop up more Russian stocks.

“We believe that Russian equities are at levels which make them a compelling buy and that patience will be rewarded,” said FMG chief investment officer Joe Portelli.

The largest equities in the RTS Index are Gazprom OAO and NK Lukoil OAO, each of which make up about 13% of the index. Gazprom’s forward price-to-earnings ratio is just 2.6, far lower than most other BRIC-nation energy companies, according to Thomson Reuters data. “Russian stock prices could triple and they would still be at a valuation discount. But Russian companies are not nearing bankruptcy,” said Chris Darbyshire, chief investment officer at Seven Investment Management in London, which overseas assets of about $10bn.

“In fact, expectations for Russian earnings this year have remained relatively steady, whereas expectations for most developed markets, including the US, have fallen.”

Seven Investment invests in a broad range of emerging market stock and bond benchmarks, in which Russia represents about 6% and 10% of the total indexes.  “We would add (to positions) at some point,” Darbyshire said.

The wild card is whether the saber-rattling between Russia and Ukraine will intensify, and how much it hurts the Russian economy. Growth there has slowed to less than 2%, inflation has risen and capital outflows have escalated.