Cade, head of investment companies research at Numis, says it is hard to forecast when fortunes will turn around in Russia, but investors with steel nerves could be rewarded for taking the plunge. “Political events are driving sentiment, so it’s hard to forecast, but the usual time to buy [these markets] are when people are wary of them and they are out of favour,” he said.
“[Given everything that is going on in Russia] it’s an interesting time to look at the market.”
Russia’s fortunes could be bolstered by this week’s ground-breaking $400bn agreement to supply China with natural gas, though the actual price breakdown isn’t known.
The deal is one of the world’s largest energy pacts, and is the biggest for Russian natural gas giant Gazprom.
Investment in infrastructure and exposure to the east could bode well for the Russian economy, but this remains to be seen.
Rowan Dartington’s Tim Cockerill warns investors need to look at more than just the Russia-China deal as a catalyst.
“I would be quite wary because the politics are more dominant than they were 12 months ago,” he said. “I wouldn’t tend to look at a situation like this and say this is an opportunity too great to miss.”
“What can seem like a good idea today can actually unravel quiet quickly, especially if the politics are so dominant.”
However, Cockerill says when you look at the wider picture, taking in cheap valuations and ongoing underperformance, investors who can sit through the volatility could stand to gain.
“If there are other things going on [besides the Russia-China deal], it could be worth a longer term punt,” he said.
David Reid, who co-manages the BlackRock Emerging Europe trust alongside Sam Vecht, says the pair continue to be positive about Russia’s prospects, but say it will take time before investors see the impact of Gazprom’s deal with its eastern neighbours.
“It’s an important deal, something both sides have been working on for years,” he said. “Russia will be developing its markets to the east as well as to the west.”
“In the short term, it’s more a question of growth. [The deal] does involve an awful lot of capital expenditure, so we’ll have to wait a few years before the volumes start flowing. It’s a few years out before we’ll see the full impact.”
However, he says the seismic shift in Russia’s focus should force investors to sit up and reassess their thoughts about the Russian energy sector and the Russian market in general.
“Russia has very rarely been cheaper,” he said.
In fact, Russian equities are trading at their lowest level since 2009, after suffering a terrifying plunge in the height of the financial crisis in 2008. Since that low, the FTSE Russia Index is up 84.19 per cent, according to FE Analytics, though it has fallen more than 20 per cent from its highs in August 2011.
Performance of index since 2009
Source: FE Analytics
While Reid says the deal will be profitable in the longer term for Gazprom, he warned the company will have to shell out a lot of capital to get the ball rolling, so investors will have to wait for returns. He also points out the expenditure will delay expected dividend payouts, which had been on the cards for the firm.
However, he thinks the massive infrastructure push that comes with expanding gas pipelines to China will benefit companies like equipment suppliers and trickle down into the wider economy as workers have more money in their pockets to spend on consumer goods.
Cockerill says the BlackRock Emerging Europe investment trust is a good choice if you want to temper your exposure to Russia, but not go as low as a wider emerging markets fund.
Reid’s BlackRock Emerging Europe trust has seen its discount widen back out to 8.5 per cent from a one year low of 4.72 per cent, putting it on par with its average discount, according to Cade.
“If you do believe the market has been de-rated and will recover, you should see that discount narrow a bit,” Cade said.
The trust has had a difficult time amidst the general turmoil in Russia and Ukraine as well as a general sentiment shift away from emerging markets over the last several years, losing 19.89 per cent over the last three years, broadly in line with the index.
However, over the last five years it has strongly outperformed the MSCI Emerging Europe index, picking up 57.27 per cent, according to FE Analytics.
Performance of trust vs index over 5yrs
Source: FE Analytics
For a pure play on Russian equities, both Cade and Cockerill recommend the JP Morgan Russian Securities trust, which is trading on a discount of 10.52 per cent.
“Personally, that is the one I would probably use,” Cockerill said.
But he warns that due to the concentrated nature of the portfolio and the fact that it is invested in Russian equities, investors need to be aware there’s a lot of volatility to take on.
“The share price today is the same as it was in 2006. At one point since you could’ve sold it for a profit of 80 per cent or you could have sold it for a loss of 70 per cent.”
“That just goes to show you should buy it when it looks cheap. Does it look cheap now? Yes, it does, but it could still look cheap in 12 months.”
The trust has taken a beating over the last one and three years, falling in line with the index over each period. The trust has lost an eye-watering 28.35 per cent over three years.
However, investors who were willing to hold on for slightly longer would’ve seen gains of 40.42 per cent over five years. The MSCI Russia 10-40 index made 35.81 per cent over the period.
Performance of trust vs index over 5yrs
Source: FE Analytics
BlackRock Emerging Europe has ongoing charges of 1.46 per cent and JP Morgan Russian Securities has charges of 1.82 per cent.
