HSBC Global Asset Management has struck a positive note on Russian stocks in the run-up to the country’s presidential election on 4 March.

The UK asset manager believes that the correction seen in the second half of last year has led to attractive valuations in the Russian equity market.

Nick Timberlake, head of emerging market equities at the firm, said the Russian equity market is trading on a forward price to earnings ratio of 5.6 times, nearly a third lower than the 10-year average of 8.2 times. What is more, relative to the MSCI Global Emerging Market Index, Russia’s discount is nearly 50 per cent compared with the past decade, according to Timberlake.

In just over 20 years, Russia has gone from being the face of totalitarian communism to having the world’s fifth highest number of ultra high net worth households, according to the Boston Consulting Group's latest world report. Moscow, formerly the heart of the Soviet Union, has become the city with the most billionaires in the world. But despite the wealth creation, the country still struggles with income inequality, inefficiencies and corruption.

Vladimir Putin, the current prime minister who held the presidency between 2000 and 2008, is universally seen as the obvious winner in the upcoming presidential election. Indeed, most Western commentators have depicted the election as a coronation of the former KGB man. Putin has not made himself known as a reformer in his political career, and constitutional changes will enable him to stay in power until 2024. HSBC believes, however, that recent protests on Russian streets are likely to accelerate electoral, political and economic reform initiatives.

Return to risk

The sovereign debt crisis in Europe, fiscal concerns in the US and worries over a slowdown in China led to a global risk aversion in the summer of 2011, and all emerging market stock indices suffered as a result. On the back of actions taken by major central banks and positive economic data from the US, markets have rallied so far in 2012, and investors have returned to more risky assets.

At the same time, Ed Conroy, co-manager of the HSBC GIF Russia Equity Fund, said that any further decline in the international economic situation would likely cause weakness in the Russian market. If global growth concerns intensify and Russian politics deteriorate, the firm’s forecast would be turned on its head, he said. Conroy thinks, however, that too much gloom is already priced into Russian equities.

The soaring oil price, with Brent crude currently at above $120/barrel, is good news for the Russian economy, which is one of the world’s largest oil producers and exporters. “Current consensus earnings forecasts for Russian companies are based at around $95/barrel, so there is room for upside if prices stay stable, and a cushion should the oil price retreat,” Conroy said.

Russian equities represent the largest overweight position in the HSBC GIF BRIC Equity Fund and other of the firm’s emerging market portfolios.