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 Russia's equity market has plummeted 18 percent so far this year.
Foreigners dumped the country's stocks, bonds and the ruble
following the early March invasion of Crimea, a territory of
Ukraine. It now faces economic sanctions that could worsen if the
crisis escalates.
Investors have reacted with their feet. The ruble is down nearly 9
percent on the year, and investors have pulled about $4.4 billion
from stocks and $4.1 billion from bonds between September 2013 to
the middle of March, according to the latest data from EPFR Global.
"Russia's stock market right now is one of the cheapest in the
world, and probably one of the most hated," said investor and
commodities guru Jim Rogers, chairman of Rogers Holdings, in
Singapore. "This is the time to buy Russia."
Those betting on Russia now should have a long-term horizon. After
citizens in the Crimean peninsula voted for annexation by Russia,
the United States and European Union reacted by issuing sanctions
that, while limited in scope, could be broadened.
Russia's economy has weakened as inflation has risen and investments
have stalled. IMF data shows the country's reserve assets declined
to $493.3 billion in February from $509.6 billion in December as it
has defended its currency. The central bank raised interest rates by
1.5 percentage points to stem the ruble's fall.
Rogers, who has been investing in Russia for the last 1-1/2 years,
said he bought Russian stocks last week. He said if more sanctions
are imposed and the equities market declines further, there would be
more buying opportunities in Russia.
Rogers said he is looking for non-energy companies — a tall order
considering the RTS Index of 51 leading Russian companies is heavily
skewed toward energy (58 percent of the index) and basic materials
(13 percent).
Estimates from emerging and frontier market specialists FMG Funds,
based in Malta, show that Russian stocks are trading at a
price-earnings multiple of about four times 2014 earnings, with an
annual dividend yield of 5 percent.
By comparison, the United States trades with a P/E ratio of nearly
16 times earnings and a dividend yield of just 2 percent, FMG data
show.
FMG, which has $150 million in emerging and frontier market assets,
is looking to scoop up more Russian stocks.
"We believe that Russian equities are at levels which make them a
compelling buy and that patience will be rewarded," said FMG chief
investment officer Joe Portelli.
The largest equities in the RTS Index are Gazprom OAO and NK Lukoil
OAO, each of which make up about 13 percent of the index. Gazprom's
forward price-to-earnings ratio is just 2.6, far lower than most
other BRIC-nation energy companies, according to Thomson Reuters
data.
"Russian stock prices could triple and they would still be at a
valuation discount. But Russian companies are not nearing
bankruptcy," said Chris Darbyshire, chief investment officer at
Seven Investment Management in London, which overseas assets of
about $10 billion.
"In fact, expectations for Russian earnings this year have remained
relatively steady, whereas expectations for most developed markets,
including the United States, have fallen."
Seven Investment invests in a broad range of emerging market stock
and bond benchmarks, in which Russia represents about 6 percent and
10 percent of the total indexes.
"We would add (to positions) at some point," Darbyshire said.
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NO ESCALATION SEEN
The wild card is whether the saber-rattling between Russia and
Ukraine will intensify, and how much it hurts the Russian economy.
Growth there has slowed to less than 2 percent, inflation has risen
and capital outflows have escalated.
Some investors are in a defensive mode. Standish Mellon Asset
Management, which manages more than $180 billion in fixed income
assets, pared its Russian dollar-denominated and local bond holdings
during the recent crisis.
"We thought that whatever valuations we have in Russia, it's better
to exercise some caution," said Cathy Elmore, emerging market
portfolio manager and senior sovereign debt analyst at Standish in
Boston. "We need to be aware of this political layer that has been
driving valuations."
Crimeans voted to secede from Ukraine and join Russia in a March 16
referendum. The United States and EU, worried that Russia could seek
to take control of parts of eastern and southern Ukraine, have
warned they could impose broader sanctions affecting entire sectors
of Russia's economy.
"It's probably fair to say that the crisis will take its toll on
(Russian) GDP (gross domestic product growth)," said Yakov Arnopolin,
vice president and portfolio manager at Goldman Sachs Asset
Management in New York.
At the peak of the Russian crisis in early March, the spread on
Russian sovereign debt relative to Treasuries had widened to about
350 basis points on the JP Morgan EMBI+ benchmark debt index. It has
since narrowed to about 260 basis points.
Yields on 10-year sovereign Russia debt climbed to 9.62 percent last
week, the highest in about 2-1/2 years. It has since fallen to 9.17
percent, still an elevated level.
"On the sovereign and corporate debt level, Russia's indebtedness
remains very low. The impact on the economy is much more limited
than what the current spreads imply," said Goldman's Arnopolin.
Goldman, which holds both Russian and Ukraine debt, said it has not
made changes to its portfolio, maintaining a small overweight on
Russia's dollar-denominated debt. The firm has more than $349
billion in fixed income, currency, and commodity assets.
"Russia is not going away. This is a classic example of the market
panicking, of throwing the baby out with the bath water," said FMG's
Portelli.
"There's a very good possibility that if you have a three- to
five-year horizon, you'll double your money in Russia."
(Reporting by Daniel Bases and Gertrude Chavez-Dreyfuss;
editing by
David Gaffen and Dan Grebler)
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