Russia remains a no go area for emerging market investors even though a devalued rouble has made com...
Russia remains a no go area for emerging market investors even though a devalued rouble has made companies extremely cheap.
In response to Russia's political, social and economic problems, fund managers are underweight the market or avoiding it altogether.
Although the local economy has improved since the collapse of the rouble in August last year, they are still bearish. Only minor positives, led by a firmer oil price, are preventing a mass exodus of investment from Russia.
According to Michael Russell, group economist at City of London Investment Group, firmer oil prices are having a positive effect on the energy sector in Russia. Russell says the group has a neutral exposure to Russia through country funds against the IFC Global Composite Index at 1.46%, indicating it is not bullish on Russia but cannot ignore the positives.
He says: "We need to be extremely selective within Russia. The energy sector is performing well because of the higher oil prices and telecoms are also of interest."
He says the economy is showing signs of slight improvement and even though it remains depressed, the situation is not in continual decline.
Last year Russian output shrunk by an estimated 4.6% and looks likely to shrink by a further 4% this year. Inflation, estimated at 27.3% last year, is likely to be even higher over 1999. High interest rates at 40% are expected to remain stable and there are no anticipated further drastic devaluations of the rouble (now trading in the range of 24/25 roubles to the dollar compared with about six roubles to the dollar at this time last year).
Giles Neville, manager of the Schroder Global Emerging Market Fund, has marginally underweighted Russia against the Morgan Stanley Global Emerging Market Free Index weighting of 2%.
Neville says: "The bulk of our exposure to Russia is in the oil sector and we are playing that on two fronts, the first that the global economic outlook will improve and the second that we have benefited from the rise already seen in oil prices."
Over the past two years the Schroder fund has had a lower exposure to Russia, but was able to capitalise on the low valuations of oil companies after the rouble collapsed.
Richard Hopkins, fund manager at Perpetual, says although there are some positives for investing in Russia, he has maintained a zero exposure.
He adds: "Russia is not a stock market it is just an informal and regulated trading stall set up by a number of people who call themselves stockbrokers."
He says optimism about the IMF deal, coupled with firmer oil prices, company liquidity and GKO-related accounts had encouraged other buyers into the market.
He continues: "We can see technical reasons why some investors are optimistic, but philosophically we are not keen and will not invest in such firms."
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