By Jerome Booth, Chairman, New Sparta.
It’s generally a good idea to buy cheap and sell high, not the other way round. On any fundamental value basis the Russian market is oversold – not least due to the relentlessly negative headlines in the Western press. Of course one shouldn’t try to catch falling knives. But Russia is past that point. Its markets are rallying. The ruble-denominated MICEX index is up 14% so far this year, we’re now seeing significant capital inflows into Russian stocks, and bondholders have also chalked up healthy year-to-date returns. The Russian market, while unfashionable, is thus a smart investment destination for those more interested in risk adjusted returns than peer group pressure or intellectual fashion.
While sanctions were meant to punish Russia, and to some extent they have, they’ve also encouraged domestic producers. Western hostility has also pushed Russia, China and India closer together, boosting trade and diplomatic cooperation between these three extremely significant economies. Sanctions have not cut Russia off, so much as created trade diversion. The US and Europe may have cut ties, but the rest of the world has not.
Rating agencies lost credibility over sub-prime. As I discuss in my book, “Emerging Markets in an Upside Down World”, their sovereign ratings fare little better as a guide for investors than their corporates ones. Western ratings agencies consistently under-estimate the fiscal strength of Russia – which has consistently run budget surpluses in recent years and has the world’s third-largest haul of foreign exchange reserves. These same agencies also massively overstate the financial health of leading Western nations – many of which are not only highly-indebted, but with sovereign bond markers reliant on a precarious combination of foreign creditors and printed money.
While the February ceasefire remains fragile, violence in Eastern Ukraine is thankfully receding. With all sides now focussed on a producing a financial rescue package for Ukraine, which is likely to include Russian as well as Western money, there is a good chance the worse of the conflict is now behind us.
*Dr Jerome Booth is an economist, entrepreneur, investor, commentator and leading expert on emerging markets. New Sparta, his London-based investment firm, has invested in a range of businesses in telecoms, film, journalism, publishing and insurance – typically with a controlling interest.
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