Getting a bargain in the Russian markets

February 3, 2012 Nikita Dúlnev
Investing in Russia may not be the easiest thing to do, but the payoffs are well worth the trouble.
The Russian market is one of the cheapest in the world, and investors used to emerging economies have long been taking advantage of the discounts.Source: PhotoXPress
The Russian market is one of the cheapest in the world, and investors used to emerging economies have long been taking advantage of the discounts.Source: PhotoXPress

It’s easy to make money playing the Russian stock market. A price fluctuation in excess of 2 percent is considered sufficient to alarm traders on a developed market, but for Russia, 1 to 2 percent is routine. The Russian market is among the cheapest in the world, and investors used to emerging economies have long been taking advantage of the discounts.

But more and more, investors from developed economies are discovering this open secret, with plenty of encouragement from the Russian government. Shares can be bought in U.S. dollars; investment companies issue regular marketing surveys in both Russian and English; and the main R.T.S. index has a comprehensive English-language version of its Web site.

The Russian market is the most attractive of all the emerging economies in terms of its basic indices. “By the price-to-earnings [p/e] ratio and E.B.I.D.T.A., the Russian market is among the cheapest in the world,” said Oleg Achkasov, head of equity trading at V.T.B. Capital. “For example, the average p/e ratio in Russia is 5, compared with 8 to 10 in other emerging markets.” Achkasov explained the discount as the result of Russia’s problems with governance and transparency issues. However, he continued, once these are resolved, the discount is likely to disappear.

Foreigners interested in trying their luck on the Russian stock market are first faced with the challenge of selecting a broker. While most foreign investors prefer to work with someone from their own country, local brokers say this is a mistake as the foreign banks operating in Russia do not make trading on the Russian market part of their core business.

“They [the foreign banks] have worked here long enough; some have been successful, but their main source of income lies outside Russia,” said Achkasov. “By contrast, for us it as our key product; Russian companies have a broader product lineup, better contacts and deeper market analysis.” Achkasov added that foreign investors should not be afraid of working with Russian brokerages as they keep up with foreign regulations and often have branches registered in Europe, the United States, China and other countries that operate in compliance with the local legislation.

After determining with whom to invest, an investor must consider what to buy. “The Russian stock market (like any other) is a notion combining thousands of instruments and shares. The simplest and most reliable instrument is blue chips – the biggest companies, mostly oil, telecoms and financial corporations. They grow steadily but slowly, i.e., the risks are lowest here but the yield is far from the best,” said Alexander Parfyonov, an analyst at Unison Capital. “At the same time, the low-liquidity second and third tiers trade potentially high-yield securities of smaller companies that are not always transparent. Blue chips provided an average yield of 4 to 5 percent from January to September 2011, whereas in the third tier, yields averaged 20 percent.”

Parfyonov suggests that Russia may become a more attractive option the longer the global financial crisis goes on. “Many of these securities will become a safe haven for their owners if the global economy slips into a new recession,” Parfyonov said. “Should the situation on the world financial market deteriorate and should the market value of stock fall, these stocks will safeguard their holders against excessive losses and yield considerable profits when the situation gets back to normal.”

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