Russia’s accession into the World Trade Organisation (WTO) is likely to result in a significant boost for economic growth and direct foreign investment, according to the Eastern European Trust’s David Reid. 

Reid (pictured), head analyst of the BlackRock-managed portfolio, believes this “historical reform” will be a big help to fund managers focused on the region, who are already encouraged by strong fundamentals and cheap valuations across a number of sectors.

"Almost all the countries that have joined the WTO in the past have experienced sustained improvements in foreign direct investment and economic growth," he explained.

"China’s entry in 2001 is often held up as one of the big success stories, but the eastern European region can also boast a record of success including countries like Poland, Hungary and the Baltic states." 

"Many sectors stand to benefit from this accession. For example, many export industries where Russia has a competitive advantage - such as steel and chemicals - will have easier access to foreign markets."

"The consumer sector will also benefit from higher employment and wages as foreign investment in the economy takes effect." 

"Greater competition and lower tariffs will improve the quality and cost of goods and services, freeing up resources across the whole economy for additional investment and consumption." 

"Perhaps the most important point to note is that Russia’s accession comes after 18 years of talks, which could easily have dragged on for longer."

"Russia’s leadership has decided now is the time to send a signal to the world that it is finally serious about engaging with global commerce, a key message to take away from these events." 

While Reid believes this is a long-term trend, he says historically cheap valuations in the Russian market imply a good entry point.

According to FE data, the MSCI Russia index is down 14.09 per cent over six months, compared with a gain of 0.74 per cent from MSCI World. 

Performance of indices over 6-months

 

Source: FE Analytics

"This is a historic development, but we are not anticipating miracle results in the short term," Reid said. 

"Only a certain proportion of reforms are immediate, with the rest being phased in over a period of several years."

"Ongoing work by the government is required, but the WTO accession agreement is a powerful ‘anchor’ for policy that should ensure the direction of travel is firmly positive." 

"The Russian equity market is very close to historic lows in its valuation, both compared to its own history and to other emerging markets."

"This is in spite of the fact that the economy has been growing steadily since the crisis and has achieved record low inflation and unemployment levels this year." 

"WTO accession will help to highlight the country’s strong investment fundamentals and the market deserves renewed consideration from investors," he finished. 

The Eastern European Trust has returned 59.74 per cent since Sam Vecht took over as lead manager in May 2009, almost exactly in line with its MSCI EM Europe 10/40 benchmark.

According to the AIC, it has a total expense ratio (TER) of 1.1 per cent, excluding performance fees, and is currently trading on a discount to NAV of 13.2 per cent.