By Peter Elam Håkansson, Chairman and Head of Public Equity investment team
The Russian market has certainly not been generous to investors during the first four months of 2013. We did however see a strong rebound in the last week of April but the Moscow stock exchange is still at a minus so far this year. This development stands in stark contrast to Western markets which started the year with a bang. So, what’s happened in Russia?
{{{*}}}
Newly awakened fears related to growth prospects in the world, and not least in China, put downward pressure on commodities and the price of crude oil. There is still a strong correlation in the short term between how oil prices trend and the Russian equities market.
Another important contributing factor is the uncertainty surrounding dividends paid on shares in TNK BP, since Rosneft took control of the company. This was accentuated when it was communicated that TNK BP would scrap the dividends and instead loan 10 billion dollars to its new mother company Rosneft. This was not received positively by the market and the price for TNK BP fell almost 41 percent in March. After the announcement was restated, in a milder fashion, the price recovered somewhat to climb by almost 23 percent in April.
Continued uncertainty in regard to the reforms in the utilities sector also pressured prices in this sector.
The cold winter was blamed for lower activity within the country for the first quarter, leading to a preliminary GDP figure of 1.1 percent, compared to 4.4 percent for the same period last year.
And last but not least the market was also impacted negatively by the news that the well-known blogger and opposition politician Alexei Navalny had been accused of theft of lumber worth 510, 000 dollars. His trial was commenced on the 17th of April in the town of Kirov.
Within the management team at East Capital we have long had low exposure to the commodities market and instead find better prospects of value and profit growth in the domestic areas of the Russian economy. There are companies here which continue to grow at reasonable valuations and with limited exposure to political influence. In fact, the difference between these sectors and the market as a whole is at a record low. An example of this is the portfolio we have invested in within the Russia Domestic Growth fund which has a P/E ratio of 7 and an expected growth in profits of 27 percent for 2013. Compare this to the market which at the present is valued at P/E of 5.0 and is expected to have marginal growth in profits of 0.1 percent.
President Putin and the Government are further aware that lower growth in their economic environment as a whole also negatively affects Russia and they intend to present a programme to stimulate the economy in the near future. Let us see what that contains.
Sorry, comments are closed for this post.