When William Shakespeare wrote the words ‘when sorrows come, they come not single spies, but in battalions’, he could well have been writing about Russia’s present predicament.
With a 40 per cent slide in oil prices this year, a battered rouble, economic sanctions and expectations for its economic growth in 2015 being just 0.8 per cent, investors are wondering whether Russia’s current misfortunes represent a buying opportunity or a portent of worse to come.
Viktor Broczko, senior investment manager at London-based Advance Emerging Capital, thinks if the Ukrainian issue started to de-escalate, value players could be tempted back into Russian equities.
Although a large number of investment houses still predict oil prices will return to roughly $90 (£57.35) in 2015, Mr Broczko says it is notoriously difficult to predict prices correctly and that at current levels, the Russian budget is in deficit.
“If oil prices were to sink further, then even if there is a positive resolution to the Ukrainian issue, the Russian market will probably disappoint,” he says.
“If oil prices stabilise or recover and the political climate improves [with sanctions eased], then the Russian market could do very well.
“We think at current valuations a lot of the bad news has been priced in and there is a good chance the market will recover to some extent from current levels in 2015.”
But Nathan Griffiths, an emerging markets equities manager at ING Investment Management, is negative on Russia. He says sanctions will have a substantial impact on investment levels in the country.
He explains: “Lending from foreign banks has come to a complete standstill, while the local banks are not particularly well capitalised. Capital outflows from the country have been dramatic and foreign direct investment will be negligible. The collapse in the oil price significantly reinforces these trends.”
With nominal wages flat, he says this will depress Russian consumers’ purchasing power, while higher rates and capital outflows will lead to a sharp fall in investment.
Mr Griffiths also predicts a significant recession in 2015, although he says the impact of the currency collapse will be delayed so that it will be some months before it is felt.
“The country really needs the oil price to rally sharply from here and we suspect this will not be forthcoming,” he predicts.
“If there are no changes in direction politically, then the stockmarket will continue to struggle. Valuations appear very low, but Russia has high operational gearing and so a weak economy will be felt.”
But Robin Geffen, manager of the Neptune Russia and Greater Russia fund, makes the point that following the central bank’s move to allow the rouble to float freely, the direct impact of the oil price on government finances has been greatly reduced.
“The weaker rouble can offset the lower oil price, allowing the budget to balance with lower oil prices,” he claims.
“In October, the 10 per cent fall in oil and the 8 per cent depreciation of the rouble meant that monthly fuel revenues were very close to the average of 2014.”
The question now is whether Russian equities are an opportunity or a value trap.
Mr Broczko believes there is still value in Russian equities due to many companies posting good financial results, especially in the export sectors that are benefiting from rouble weakness.
Nicholas Mason, an emerging market equities fund manager at Invesco Perpetual, also sees compelling valuation opportunities, such as exporters and domestic food retailers. “Companies that are likely to benefit from rouble weakness and dollar strength are not restricted to the oil industry,” he says.
“In particular, I favour companies such as fertiliser producer Phosagro, gas producer Novatek and steelmaker MMK.”
But Thomas Wilson, a Schroders emerging markets equities fund manager, is underweight Russia in spite of the cheap valuations.
He says the pace of change and the multiple risks relating to crude oil prices, currency, the macroeconomic outlook and government policies make it too early to buy.
Mr Griffiths also thinks Russia is a value trap, especially if it stays involved in Ukraine as economic sanctions imposed by the west would remain. But if substantial internal reforms were to materialise, he believes the market could see a reprieve.
In terms of accessing Russia, Mr Broczko recommends buying either an actively managed, Russia-focused closed-end fund, or a Russian exchange-traded fund, whereas Mr Wilson favours investing in exporting companies that benefit from rouble weakness.
Mr Griffiths says in 2015, investors should consider the secondary round effects of the dramatic moves seen in oil and the currency in 2014.
“We suspect some of this year’s winners – particularly the steel stocks – will struggle as investment dries up, but there are a few pockets of high-quality, Russia-originated companies that are structurally attractive and not exposed to domestic issues, such as within IT services,” he claims.
Anna Stupnytska, global economist at Fidelity, suggests playing the oil and gas theme outside Russia via countries such as Thailand, India, South Korea, Turkey and central European countries, which stand to benefit from lower oil prices because of the amount they import.
As for active versus passive, there is general consensus that active strategies are strongly preferable to passive.
Mr Griffiths says: “Even if the Russian market rallies, the difference between the best and worst [stocks] will be significant and this will not be captured in a passive approach.”
