Russia is the largest market in almost all ways in Eastern Europe – whether by GDP, population size, or total market capitalisation – and is shrugging off its recent pariah status for investors.
For us stock pickers, the addressable equity market is, however, much more limited.
One reason for this is the structure of Russia’s equity market.
Commodity stocks make up over 60 per cent of total market capitalisation.
We tend to avoid commodity investments, as we don’t believe that our view on underlying commodity prices adds value for our investors.
The commodities space, or even government-controlled companies, do not necessarily make bad investments.Furthermore, the majority of Russia’s largest companies are state-owned, which in some instances translates into poor corporate governance and treatment of minority shareholders.
So far, so negative. But this does not mean that Russia is devoid of opportunities.
The commodities space, or even government-controlled companies, do not necessarily make bad investments.
Sberbank, the banking behemoth, is one example, and is an extraordinarily well-run company with a market position that might well be unique worldwide, despite the state’s majority ownership.
And there are also ways to widen the universe of investable stocks that benefit from the strong structural growth drivers of the Russian economy.
There are, it turns out, plenty of western European companies with strong ties to Russia and the region, companies which can benefit not only from these long-term drivers, but also the shorter term economic boost from higher oil prices.
The majority of these companies are located in countries with historic links to the region.
Accessing Russia’s recovery
Russia is a big market and a big economy, with a great deal of potential.
Yes, there are plenty of companies whose characteristics make them unattractive for us as stockpickers with less interest (or expertise) in guessing the next move in the price of iron ore or crude oil.
But by venturing slightly further afield, one can find companies that benefit from the long-term growth trends Russia provides, with the added benefit of often better liquidity and less corporate governance risk.
If some of these business models and management teams happen to be domiciled in countries which do not employ a Cyrillic alphabet, this is not an obstacle but rather it is an additional opportunity.
Lukas Schmitz, investment manager of the SWMC Emerging European fund
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