Morningstar's "Perspectives" series features investment insights from third-party contributors. Here, Robin Geffen, CEO of Neptune Investment Management and fund manager of the Bronze-rated Neptune Russia & Greater Russia fund, discusses his outlook for the country and highlights the key investment themes that he is focusing on.
We are monitoring the situation in Russia extremely closely, and while we have no Russian holdings in our global funds, we continue to find select opportunities for our Russian portfolios. Overall we have increased our holdings in exporters that have less exposure to domestic economic headwinds and that stand to benefit from a weaker ruble. Within our domestic holdings we are focused on sectors and companies that are able to generate strong returns and where structural growth drivers remain intact despite the cyclical slowdown in the economy. This includes sectors like telecoms, IT and food retail. We invest in companies here that have high quality management teams, proven execution track records and benefit from a lack of international competition in their sectors, boosting returns.
We do see a moderate recession in Russia this year, and our current forecast for 2014 Russia GDP growth is -0.3%. This compares with a contraction of -7.8% in 2009. Under current conditions we expect the recession to be short-lived and forecast a return to growth in 2015.
Looking at foreign trade, to some extent Russia will be able to substitute food imports from embargoed countries with food imports from non-embargoed countries, such as Latin America. For instance, Brazil increased its exports to Russia in July, prior to the introduction of sanctions, by nearly 80%. Nevertheless, we are likely to see some upward pressure on Russian food price inflation. In terms of both the magnitude and the social impact, seasonality will play a big role. During the summer and autumn, Russia tends to experience very moderate food price inflation, often even some slight deflation (as shown in the chart). So the embargo’s effect will become more of a problem in winter.
The price-to-book ratio of the Russian market is now just 0.7x, only marginally above the global financial crisis lows when the Russian economy contracted by -7.8%. This has taken the Russian market’s discount to emerging markets back above 50%, approaching levels not seen since 2001. Aside from low valuations, Russia also has one of the highest dividend yields in emerging markets (4.6%) and one of the lowest payout ratios (16.5%), providing strong support for the current dividend levels. That said, we would expect volatility in the market to continue while tensions remain in Eastern Ukraine*.
We continue to believe that the Russian economy has the potential to grow over the coming years and to offer the basis for strong investment returns, but its ability to fulfil this potential is dependent upon its cooperative integration with the global economy.
In terms of the wider global outlook, in the past couple of weeks we have seen ‘risk-off’ sentiment, which has manifested in a certain pattern of asset price movements (e.g. USD and JPY strength + falling bond yields + falling equities). But, looking beyond the short-term volatility, we are still bullish. We are positive on US growth and satisfied that Beijing stabilised Chinese growth in Q2. We believe that Europe is in something of a holding period for growth at present, following the recovery from recession, but we feel that ECB policy will be more aggressive and effective than the market expects over the next 12 months.
*Source: Bloomberg as at 12.08.14
Morningstar Disclaimer
The views contained herein are those of the author(s) and not necessarily those of Morningstar. If you are interested in Morningstar featuring your content on our website, please email submissions to UKEditorial@morningstar.com.
Neptune Disclaimer
These are Neptune’s views and as such this document is deemed to be impartial research. We do not undertake to advise you as to any change of our views. This is not a solicitation or an offer to buy or sell our funds. All information is given in good faith but without any warranty. Neptune does not give investment advice and only provides information on Neptune products.
