
Challenging conditions for Russian equities - Neptune

Russian equities are facing ‘challenging conditions' following the South Ossetia conflict, but growth in the region will not be inhibited, according to Neptune's Rob Burnett.
Burnett, head of European equities at Neptune, believes a combination of the Georgia conflict, recent oil price reduction and fears of state intervention in the company Mechel have ruffled investor feathers, with many managers pulling money out of Russia in recent months.
Burnett says: “The convergence of these three factors has created challenging conditions for Russian equities. However, they are down to attractive valuations.
“While we expect continuing volatility […] our outlook for the remainder of 2008 is very positive, with Russia still set to rank among the top performers globally.”
Burnett believes there remains a significant level of misunderstanding of the Russian market: “The falls witnessed so far in 2008 largely reflect heightened risk aversion among western investors resulting from the global financial crisis.“
However, the Russian economy is little exposed to the credit crunch and the country remains politically stable in spite of geopolitical concerns on its boundaries, he says.
There have been no significant changes to the Neptune Russia and Greater Russia fund which remains invested in the themes of global infrastructure development and the rise of the Russian consumer.
Nearly a third of the portfolio is invested in materials and approximately a fifth in consumer staples, while the fund is underweight in the energy sector.
Although the recent drop in oil prices has dented investor confidence, Russia’s oil and gas companies will outperform global peers due to low extraction costs, says Burnett.
Furthermore, the World Bank calculates Russia’s oil stabilisation fund absorbs about 85% of fluctuations in revenues when oil prices change, limiting the impact of oil price cyclicality on economic growth, he adds.
Investors also feared state involvement, or even nationalisation in private companies such as Mechel, says Burnett. “We believe these fears are exaggerated, while concerns over a repeat of the Yukos affair are overdone.”
He predicts the Georgia conflict’s impact on the market will be short-term. “It should certainly not inhibit Russia’s growth, even taking into consideration Georgia’s strategic position on the energy route into Western Europe.”
Russia has been involved in a number of territorial disputes, including Chechnya and these have had a negligible effect on the economy, he says.
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