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The Russian market: mixed views and performances

The Russian economy and market continue to be in a state of flux, and are likely to remain so for the foreseeable future. Falling oil prices and geopolitical events have led to analysts, investors, and ratings companies writing Russia off for 2015. However, there was considerable media coverage last week regarding the MICEX index, which is reportedly the best performing index so far this year (at 27%, compared to 14% for CAC40 and DAX in second place). This may be a temporary phenomenon, but it demonstrates that even a volatile market can generate considerable interest and investment opportunities.

YTD performance

Source: RT

It is difficult to be optimistic about Russia’s economic performance in 2015. According to the latest data published by Bloomberg, the economy is likely to shrink 4 per cent this year, and investor demand for IPOs in the Russian market is disappearing. Even with the government announcing that it will spend more than $50 billion from its emergency reserve fund this year, a recession is still on the cards.

Despite the gloomy outlook, some sectors in Russia have seen a growth in sales and share price, while others have reportedly tempted investors looking for an affordable investment opportunity.

  • The Moscow Times has reported that shares of producers of meat, fruit, vegetables, cereal crops, sugar and fish have been aided by price inflation and the ban on foreign imports. Companies such as MICEX-listed Cherkizovo and Razgulay Group have seen their share price increase exponentially since 1st August last year. According to Ivan Tchakarov, chief economist at Citibank in Moscow, food producers are the top investment opportunity in Russia in 2015.
  • The FT noted that according to a recent business sentiment survey, the rouble’s decline against the dollar has helped Russian exporters. Export orders reached their highest level since July 2014, despite the MNI Business Sentiment Indicator hitting a record low in February. Producers of Russian steel have reportedly begun to compete with the likes of China, the world’s top steel exporter, and steel companies such as Severstal, Evraz and NLMK extending their rally into 2015.
  • The Russian energy sector has been significantly hit by the Rouble’s fall and a weak oil price. However, even within this industry, there are signs that not all may be lost. The Russian government has announced that it will consider allowing Chinese investors more than 50 per cent stakes in strategic oil and gas fields. According to Deputy Prime Minister Arkady Dvorkovich, Russia is “ready to deepen its economic ties” with China, which is likely to provide much needed stimulation of the sector.
  • The economic slowdown and exchange rate volatility continues to reflect considerable risk for real estate investors. However, the current market provides an exciting opportunity for foreign buyers, as illustrated by Kazakhstani Meridian Capital’s interest in buying shopping mall ‘Leto’, and South Korean Lotte Group’s interest in buying Moscow’s ‘Atrium’ mall.

While some Russian analysts have suggested that the MICEX growth will continue into the year, the rally is likely to be temporary. Russian financial asset prices will continue to be affected by a range of factors including energy prices, currency movements, as well as geopolitics.

On the other hand, the above examples have illustrated that investors have recently been willing to give Russian assets the benefit of a doubt. According to a new survey by AT Kearney, more than half of 500 global business leaders plan to increase investments into Russia “significantly or moderately” during 2015 if geopolitical tensions subside, and 50 per cent still see Russia as a “viable” investment environment. What’s more, the RTS Index – a benchmark on the direction of Russian stocks – has been on the rise since February. As one of the best indicators of “priced in” risk and investor sentiment, the fact that the index has seen no significant downward movement in recent weeks suggests that investors continue to see opportunities in the Russian market.

RTS index

Source: FT

I believe that the oft-quoted John Paul Getty saying still stands: “Buy when everyone else is selling and hold when everyone else is buying.

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