There are reasons why the Russian stock market should be cheap; the current tug-of-war for Ukraine for example. But Blackrock Emerging Europe (BEEP) manager David Reid says that it Russian equities should not be this cheap.
“The risk perception of Russian stocks is not accurate,” he said. “The pessimism surrounding Eastern Europe is very high. It has been an unfashionable region for some time, but it wasn’t that long ago that it was trading at a premium. It is trading at a discount now, but that is closing.”
Reid says that Russian stocks are cheap both on a relative and historical basis, but there have been significant changes in the region that make it more attractive to investors.
“Joining the World Trade Organisation was a big signal that things have improved,” said Reid. “As are the growing number of international developed market countries doing business there.”
BP and ExxonMobil have recently signed new agreements with Rosneft, Russia’s state-owned oil company, extending their contracts for business. PepsiCo has a large exposure to Russia – its second largest market after the US.
Many investors are concerned about the level of corruption in Russia, but Reid, whose fund has 50% exposure to the market, says investment governance is good.
“Corporate governance is important, but we are more concerned with how shareholders are treated, and this has not been a problem for us,” he said.
Like many emerging markets, the Russian equity culture – that is the domestic ownership of Russian listed shares – is immature. But it is something the nation is keen to develop over time.
Banks and Energy
Reid is very positive on financial stocks, allocating 44.5% of the portfolio to the sector. A further 32% is invested in energy companies.
He said: “The eurocrisis made banks cheap. We have even increased our allocation to Turkish banks recently because QE tapering weakened the currency, causing the government to raise interest rates which subsequently made banks look more attractive. Banks there use modern techniques, such as credit cards, but it is old style banking – they only lend out what they take in.”
Hungarian banks are run equally prudently, having acted quickly to clear up their books following the global recession. In fact Hungary as a whole has some attractive options. Having been in a vulnerable place following the financial crisis, as it had higher levels of sovereign debt, politicians put hard and fast measures in place and it recovered quickly.
“Hungary used its flexible currency to its advance,” said Reid. “And had a properly executed recovery plan.”
What About the Ukraine?
BlackRock Emerging Europe has 3% direct exposure to the Ukraine, and around a further 1% extra exposure if you calculate by revenue stream.
“Because we are a focused fund, that 3% is just one company,” said Reid. “MHP is a London listed chicken farm company that benefits from the weaker currency. There is a lot of grain the Ukraine – an excess that can’t be exported, so these industrial scale farms benefit. It is one of the cheapest places in the world to produce grain, along with Brazil.”
