The Russian market has performed exceptionally well as companies become more open to foreign investm...
The Russian market has performed exceptionally well as companies become more open to foreign investment and oil prices stay high. However, it is uncertain whether the market still has significant upside from here.
Over the 12 months to 30 June, the MSCI Russian index has gained 29.82% in sterling terms, substantially outperforming the MSCI World Index, which has delivered a negative return of 7.95% over the same period.
Since global stock markets started to recover from 10 March, the Russian market has climbed 30.73% to 30 June, while the MSCI World market has advanced by just 18.09%. Russia features many positive factors, as the economy is well positioned to continue growing, given a backdrop of improving productivity and corporate restructuring, according to Oleg Biryulyov, manager of the JP Morgan Fleming Russian Securities investment trust.
In particular, he cites the falling inflation rate. Inflation has fallen from more than 20% in 2000 (and 85% in 1999) to a forecast rate of 14% for 2002.
Estimated GDP growth for Russia in 2002 was 4.3% and should exceed that level this year ' on a par with predicted growth rates in Asian emerging markets.
Certainly, the country's growing importance as an oil producer cannot be ignored. Russia is now the world's second largest producer of oil after Saudi Arabia and the oil and gas sector accounts for nearly 70% of the stock market in Russia.
'The Russian oil sector is extremely competitive compared to other oil producing countries, with production costs lower than the global industry average. Thanks to the high level of capital investment and exploration in the Soviet era, it generates greater free cash flows per barrel sold than the world average.'
Biryulyov adds, however, that Russian oil companies are still substantially undervalued compared with their overseas peers, giving scope for considerable price readjustment.
Philip Ehrmann, emerging markets fund manager at Gartmore, is starting to take profits in Russian companies following strong outperformance. He expects a period of consolidation in the region is likely.
'But there is no reason to flee as the Russian stocks continue to move strongly. There is strong domestic liquidity and liquidity from foreign investors, who continue to be underweight,' he says.
His concern is that although Russia has very rich oil assets, there are problems translating the earnings from oil into re-engineering and repositioning an economy whose Soviet past has left a legacy of uneconomic production, such as tanks and helicopters, Ehrmann says.
Therefore, he would like to see the market diversifying but does not expect to see this for several years.
'The Russian oil market is getting fairly fully valued. I would like to see a broadening out of the stock market with consumer companies and maybe some financials coming through,' he adds.
He added that while Russia's dependency on oil has been advantageous amid a high oil price, problems are inevitable should the oil price fall.
Strong oil price supports producers.
Inflation is under control.
Oil prices still arguably undervalued.
Two global vehicles
'Further plug advice gap'
Must appoint separate CEOs and boards
Advisers do come out well
Will report to Mark Till