Russian stocks are "ridiculously undervalued", according to FE Alpha Manager Elena Shaftan, who believes the new government’s economic reforms are making investing in Russia more attractive than ever.

The country’s GDP is predicted to grow at four per cent this year, its inflation is at an unprecedentedly low level of 3.7 per cent, and retail sales and investment each grew by more than 10 per cent in the first quarter, says Shaftan, who heads up the Jupiter Emerging European Opportunities fund.

Newly elected president Putin has promised to liberalise the economy, encourage foreign investment and privatise state services, and Shaftan believes that however sceptical observers may be about his intentions, Putin’s own interests will encourage him down this path.

"In order to secure his place in history as the leader who restored Russia’s greatness (a cause that he seems committed to), Putin is keen to ensure the economy grows above five per cent per annum," she explained.

"It appears he now understands that this is unachievable without reforms which liberalise the economy and attract foreign investment; hence the need to improve the investment climate and fight corruption."

The Russian government has altered regulations and tax rules to ease high-profile deals between government-backed gas company Rosneft and foreign energy companies to explore the Arctic, and this is just one of a series of reforms aimed at encouraging foreign capital into the country.

Shaftan points to changes that will bring regulation up to international standards and thereby allow UK-domiciled funds to buy the stock of Russian companies.

There is also an effort to encourage the payment of dividends, with the government expected to stipulate a minimum 25 per cent payout for state-owned companies.

"There seems to be a sea change in the dividend culture; returning cash to shareholders is becoming fashionable and respectable behaviour as companies begin to understand the culture of capital markets," Shaftan explained.

Analysts often say the Russian economy is too dependent on the price of oil, and president Putin’s pre-election spending promises were thought to be impossible without a significant rise in its price.

However, Shaftan claims that most spending promises were already budgeted in, and that if oil prices were to fall, a devalued rouble would ease the pain, while the government is strong enough to make budgetary cuts.

"Given the robust domestic macro and micro outlook, cheap valuations and little enthusiasm towards Russia, it is not hard to believe that the market could surprise on the upside in the coming months," she commented.

Performance of fund vs index since launch



Source: FE Analytics

Shaftan is positioned to take advantage if Russia does perform well, as her Jupiter Emerging European Opportunities portfolio has 73.54 per cent of its funds in the country, boosted by its three biggest holdings of Russian bank Sberbank and energy companies Gazprom and Lukoil.

She has managed the fund since it was launched in 2002, in which time it has returned 262.54 per cent, compared with 334.79 per cent from its MSCI EM Europe 10/40 benchmark.