Russia "increasingly good value" for contrarians

The Russian market is now good value and could be an attractive prospect for contrarian investors, says Alan Brierley, director of investment companies at stockbroker Canaccord Genuity.

According to Brierley, the MSCI Russia 10/40 total return index has lost nearly a third of its value since April 2011 while the S&P Composite total return has gained 51%, pushing valuations in the region below other comparable emerging markets.

"At a time when US equities are recording all-time highs almost on a daily basis, investing in Russian equities remains a sobering experience. Buoyant energy markets, reviving consumer confidence and increasing capital investment bode well for more attractive returns moving forward, however these positive features continue to be overshadowed by geo-political tensions," he says.

Contrarian investors

Subsequently, Brierley has upgraded JPMorgan Russian Securities Trust from a 'hold' to a 'buy' citing attractive valuations including a price-to-book ratio of 0.7 times compared to 1.5 times for emerging markets as a whole, and a forward price/earnings ratio of 5.3 times.

Managed by country specialist Oleg Biryulyov, JPMorgan Russian has a solid long-term record, returning 68% over five years compared to 55% from the MSCI Russia 10/40 index. However, over three years the trust has lost 25%, as has the index.

However, Brierley is not overly concerned about this. "In these ebullient times, any results that incorporate falling net asset values (NAVs) now prompt an almost incredulous double-take. With confidence at record highs, maybe these results will act as a timely reminder that equities can actually go down," he says.

"Russia, along with broader emerging markets, continues to underperform developed markets, but we believe they offer increasingly good value for the contrarian investor."

He adds that he is confident in Biryulyov's assertion that current valuations do not accurately reflect the investment picture in Russia and that opportunities lie ahead.

"Although the general economic environment has improved, valuations are now back at levels last seen during the global financial crisis, and accordingly the manager regards this as a good opportunity for active managers to add value," he says.

However, Brierley does add that JPMorgan Russian is currently trading on a share price discount of 11.4% to NAV which is above the board's sub-8% target.

A number of emerging market managers currently favour Russia, including Dr. Mark Mobius, who runs the Templeton Emerging Markets Investment Trust. Mobius has over 18% of the trust invested in Russia, significantly more than that of his benchmark, MSCI emerging markets, which has only 5% allocated to the region.

Emerging market specialist Sam Vecht also has a large exposure to Russia in his BlackRock GF Emerging Europe fund and his BlackRock Emerging Europe Investment Trust, both of which have over 50% invested in the region.