The truth is that Russia’s long-term investment drivers are still in full force, leading many to continue overweighting the country or even using current volatility to increase their position.
In fact, Russia’s largest lender, Sberbank, reported that UK and US investors hold nearly 70% of its shares, while global investors were the driving force behind Russia’s $4bn (£3bn, €3.4bn) Eurobond issue in early March.
Russia’s growth story continues to have traction, helped by the Central Bank’s gradual approach to monetary easing – meaning macroeconomic indicators in the country remain very strong. Putin’s recent landslide election victory has granted leadership stability, and international data on Russia is still pointing to strengthening growth throughout 2018.
Crucially, recent years have also seen Russia increase availability to foreign investors by stepping up corporate governance and improving shareholder value. In 2014, the ruble became a floating-rate currency, and last April saw Russia’s government demand state-owned companies pay out half of their profit in dividends.
World Cup boost
Russia remains a resource-driven equity market, accounting for around 20% of global crude oil and gas exports.
Accordingly, with the oil and gas sector making up 47.7% of Russia’s leading RTS index, the country is a primary beneficiary of strengthening commodity prices.
However, its changing demographics ensure it is no mere proxy for investing in oil and gas.
Consumer firms are benefitting from lower inflation and falling interest rates and now account for up to 6.5% of the RTS. These firms will receive a further boost from Russia hosting the World Cup.
Meanwhile, technology and agriculture firms are also experiencing exponential growth and international investment.
The real opportunity is that Russia still looks cheap, with the RTS currently offering a P/E ratio of 7.7x, compared to the MSCI Emerging Market index’s 16.5x. Russian-listed companies also provide strong average dividend yields of 5%, and payout ratios are expected to increase from 37% to 50%.
An option for foreign investors to access Russian equities is by tracking them through an ETF. This approach provides cheap, highly liquid and diversified upside as the gap between Russia’s fundamentals and its valuation continues to grow.
Debt upgrades
Unlike the equity market, the credit arena has widely recognised Russia’s steps forward. Ratings agency S&P recently upgraded Russia’s credit rating from junk to investment grade, Fitch simultaneously affirming its investment grade rating for Russia with a positive outlook.
Commentators widely saw the upgrade as an acknowledgement that Russia has adapted to western trade sanctions and lower oil prices since the 2014 crash.
Importantly, the upgrade also places Russian foreign debt on a range of global benchmarks, marking the country out as one of the most appealing of the investment grade emerging markets.
Russian debt already had strong domestic demand, but several emerging market debt managers are now claiming that ignoring Russia could lead returns to suffer.
An excellent demonstration of the newfound popularity of Russian debt came last month, when the country sold $4bn in debt on the Eurobond market. Around 170 global investors submitted $7.5bn bids in the place, and nearly half of the buyers of the $2.5bn Russia 2047 5.25% Eurobond came from the UK.
