‘Russian assets are still undervalued’

Investors are coming back to Russian equities

Russian stock exchanges are again performing well, as people are seeking higher returns amid low interest rates offered by banks. Foreign investors are also paying increased attention to Russian stocks despite concerns about poor corporate governance.

Russia’s equity market has made a remarkable revival since 2014 when it was stuck due to Western sanctions and an oil price slump, reports Financial Times. The country’s main ruble-denominated benchmark, MOEX Russia Index, has increased by more than 150% since early 2014. Dollar-denominated RTS Index added over 40% in 2019 and became the second best-performing among more than 90 major markets tracked by Bloomberg. Investors have returned to Russian assets thanks to lower interest rates, higher dividends paid by state-run companies and improved corporate governance, considers Boris Blokhin, head of Cash Equities Department at Moscow Exchange.

As Russia’s Central Bank cut interest rates five times last year to 6,25%, banks also lowered per cent rates for savers prompting some of them to turn to stocks. “Whenever they cut rates, we have new inflows,” says Blokhin. “People don’t want to keep deposits in banks, 5% returns aren’t enough for them, so they look at other instruments.” Last year, the number of private investors on Moscow Exchange doubled to 3,85 million, while total retail inflows increased by 47 billion rubles ($760 million).

Moscow Exchange main building. Photo: Fitiss

Foreign investors are also returning to the market. According to Bloomberg, foreign inflows totalled $4,6 billion in the 12 months to September 2019. At the end of 2019, foreign investors’ stakes in Russian companies totalled $80 billion, which has been the highest since the introduction of sanctions in 2014.

“Many people will realise that this market is quite different now compared to 2013-2014,” commented Alexander Branis, chief investment adviser at Prosperity Capital Management in Moscow. “If you look at earnings multiples and dividend yields, Russian assets are still undervalued,” he added.

Meanwhile, other analysts are more cautious about their forecasts. “There are limits on the potential growth Russia can generate,” considers Magdalena Polan, senior economist at Legal & General Investment Management. “Despite a lot of talk and plans drafted in the past, there hasn’t been much investment in shifting the economy away from commodities.” The country’s GDP growth climbed only a bit higher than 1% last year. While the Kremlin is trying to kick-start growth, the Central Bank is continuing to advocate the need for tight monetary policy to control inflation. “The ship is safe and secure but not moving forward,” Russia’s Deputy Minister of Finance Alexey Moiseyev said in October. “That is the problem”.

Besides, the quality of company management remains a concern for investors, says Financial Times. “There’s every prospect of the rally continuing for a little while, but with growth not very strong and [corporate] governance poor it’s unlikely it will last,” said Rob Marshall-Lee, an emerging market portfolio manager at Newton Investment Management.

By Anna Litvina