It is not normally a very sensible policy to invest in countries that have incurred international sanctions in response to their unacceptable behaviour, but Russia could be an exception. The partial recovery in the oil price has allowed its economy to return to growth, yet it remains the cheapest major market and is trading on a PE ratio of 5.8 times forward projected earnings with an attractive prospective yield of 5.9%.
Russia has lagged behind almost all the world’s major equity markets over the last five years and it now offers an intriguing value opportunity for adventurous investors. Inflation has fallen, the currency has stabilised and the World Bank expects the economy to grow by 1.8% in both 2018 and 2019.
Over the longer term the local stock market’s performance has been a lot more impressive with the Russia Trading System index making an annualised return of 14.2% in sterling terms since September 1995. This is well ahead of the 7.3% per annum achieved by the MSCI Emerging Markets index, although there has been some extreme volatility with a number of large declines along the way.
Contrarian investors can take advantage of the low valuations by buying the £258 million JPMorgan Russia (LON:JRS) investment trust, which is available on a 15% discount to NAV. The broker Numis Securities believe that it is a classic contrarian opportunity.
There are also several open-ended funds for those who prefer them. These include: Neptune Russia and Greater Russia, and Baring Russia.
JRS has been run by Oleg Biryulyov since it listed on the LSE in 2002. Biryulyov relies on bottom-up stock selection and aims to make long-term investments in structural growth companies with robust corporate governance and strong balance sheets.
The core of the portfolio is made up of companies that have the potential to become national or global leaders. There are also consumer stocks that can benefit from a pick-up in domestic consumption, and undervalued cyclicals including energy businesses like Gazprom, which is trading on a PE ratio of around 4 times earnings and yields about 6%.
One of the main risks of investing in Russia is the patchy nature of the corporate governance and although you cannot avoid the problem completely, the manager does not hold stocks where he has any deep concerns in this regard.
JPMorgan Russia is mainly focused on capital growth, but Numis believe that the final dividend in March could put the shares on an attractive 4% yield. The fund is trading on a 15% discount to NAV, although there is no guarantee that this will narrow and no clear catalyst for sentiment to improve.
Nobody knows where the FBI’s investigation of Russian involvement in the US election will end and it is perfectly possible that it could result in tighter sanctions and even lower valuations. But for adventurous investors who are willing to accept the high level of risk it could be a real value opportunity.