Damaged by the Georgia conflict, Russia's stock market has lost almost a third of its value in the last two months, according to Michael Konstantinov, manager of the Allianz RCM BRIC Stars fund.
He believes Russia’s economy is close to 'tipping point' as the present market is almost 35% under its peak and is trading close to seven times current earnings.
“The current Georgia situation was preceded by Putin’s attacks on Mechel, the mining and metallurgical firm, at the end of last month as well as the recent weakness in oil prices.
“Hence, the Russian market trades at huge discounts in an international comparison and is discounting a lot of negative news flow."
Konstantinov has reduced Allianz’s exposure to Russia to 25% of the total BRIC portfolio, mainly through cuts to energy and commodity sector exposure.
Elena Shaftan, head of the Emerging European team at Jupiter, says at the peak of the South Ossetia conflict, before ceasefire and a market recovery, the Russian stock market dropped 10% in two days. This was after it had already suffered a 20% fall since the highs of 19 May.
Like Konstantinov, Shaftan has reduced exposure to Russia in recent weeks “quite aggressively” in the Emerging European Opportunities unit trust, from 70% to 45%, as earnings deterioration was not fully reflected in prices.
However, managers are identifying attractive stocks and sectors in Russia in the current climate.
Gazprom and Sberbank are now on over six times PER with little downside risk to those earnings, says Shaftan. “We feel these are distressed levels and represent a buying opportunity.”
Sam Mahtani, director of the F&C Emerging Equities team and manager of the Emerging Markets fund, highlights the retail sector as holding up well despite a mass sell-off due to negative sentiment.
Managers are also positive on the long term outlook for Russian investing despite the recent bad headlines.
Shaftan says although the conflict in Ossetia may have tainted the West’s perception of Russia, “it has no significant impact on Russia's economic fundamentals and corporate earnings and at the end of the day we firmly believe this is what ultimately drives the markets”.
She reminds investors the Russian market has returned over 1700% in a ten year period. “Of course usually the best time to invest is when everyone else is running for the doors,” she says.
Konstantinov’s outlook is also upbeat for the region: “Remarkably, there has been no slowdown in the inflow of foreign direct investment.
“Once oil price stabilises and the political uncertainties recede, we will be able to return to our strong weighting for the country and may even increase some of our positions to a higher level than previously held."IFAonline
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