Investment Strategies

Show More Love To Russia - Pictet

Ravi Seetanna 19 May 2011

Show More Love To Russia - Pictet

Russian equities have suffered as a result of exaggerated international perceptions of the country’s political and governance risks and represent good value, say Hugo Bain and Peter Jarvis, managers of the Pictet Russian Equities Fund.

“The reality is that Russia is no worse or better than other emerging economies. Indeed, Russia has a better functioning democracy than most emerging Asian economies,” said Jarvis, speaking at a seminar in London. However, measures such as the price-to-earnings ratio and enterprise value gauge Russia as one of the cheapest markets in the global emerging market sector. Russia’s benchmark RTS Index is currently 20 per cent lower than what it was in May 2008, when it reached its peak.

While some of the world’s leading economies are steeped in government and household debt, Russia manages to keep these to a minimum. This is due to the revenues the Russian government receives from taxation of oil and gas, which is enough to fully subsidise its entire spending. This in turn allows for lower income taxes in Russia, the Pictet managers said.

These economic conditions currently present investment opportunities in the region, as many Russian companies continue to trade at much lower levels than what they would do if they were based in developed countries, due to this overblown perception of risk according to Bain and Jarvis.

Bain said: “It is true that outside perceptions of Russia are not helped by the legacy of Yukos. Investors believe that corruption has not improved and has probably worsened.” (He was referring to the Yukos Oil Company which, until 2003, was controlled by Russian oligarch Mikhail Khodorkovsky and a number of other prominent Russian businessmen. After Yukos was bankrupted, Khodorkovsky was convicted and sent to prison. The affair raised questions about the security of investments in the country.)

President Medvedev has moved to break down these psychological barriers to investment in Russia. “He has set a 1 July deadline for Prime Minister Vladimir Putin to oust ministers from the boards of large public companies, renowned for their poor governance and lack of transparency. We hope that this recognition will improve the global standing of companies and promote better governance,” said Bain.

The two investment managers agreed that investing in Russia requires a constructive attitude on commodities. While Russia harbours a great proportion of the world’s commodity reserves, forthcoming taxation reforms will aim to stimulate investment in other economic areas as Russia attempts to diversify its economy, which will allow managers such as Bain and Jarvis to diversify their portfolio without having to look outside of the country.

 Bain summarises the reasoning behind Pictet’s faith in this emerging market and speculates on its future: “Russia is a secular growth story thanks to low penetration, large population and a lack of excess debt. It also has a large internal market. Russia has the largest population in Europe and is already the largest for most consumer goods. Regarding commodities, the eventual return to global growth means that we are likely to return to a period of limited availability and high prices. Russian infrastructure investment will be a key focus, and further investment remains an option for the government if further stimulus spending is required.”

“While we recognise the risks associated with doing business in the region, these are somewhat exaggerated in our view. As it is difficult to time the Russian market, investors should treat the market as a highly attractive long-term investment opportunity,” Bain added.

As at 31 March 2011, Pictet Asset Management had €294.6 billion (around $419.8 billion), in assets under management and custody.


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