Investing Goals: Russia

WORLD CUP 2018 INVESTMENT SERIES: In the first of our eight-part series, we kick off with our Group A favourite - Russia

Emma Wall 14 June, 2018 | 7:33AM

This article is part of our World Cup 2018 Investment Series, one top market pick from each of the eight Groups – but instead of comparing sporting prowess we outline the best investment prospect.

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The 2018 World Cup kicks off today, with hosts Russia taking on Saudi Arabia in the first game of the series. The inaugural Group A match is expected to end in a home victory in the Luzhniki Stadium, but Russia is expected to fall to Group A favourites Uruguay when they play later this month.

While Uruguay may be ranked 8th in the tournament, when it comes to investment prospects it is the home nation that tops Group A – offering more exciting opportunities than Uruguay, Saudi Arabia and Egypt.

There are 32 national teams participating in the World Cup 2018, in eight groups. While the football pundits have their favourites, we’ve examined the offerings with a different aim – which of the four stock markets in each group offers the best chance for investment returns? The goal? To win a place in your portfolio.

Over the next couple of weeks, we will reveal our favourites – sometimes aligning our views with the bookies, sometimes deviating considerably when it comes to comparing sporting prowess and investment prospects.

Is Russia Still Undervalued?

In February, Morningstar Investment Management’s Cyrique Bourbon tipped Russia, saying it was 40% cheaper than any other emerging market, but recognised that some investors worry about the market being “perpetually cheap”.

In April, the market fell more than 10% overnight after the US imposed sanctions on companies with links to Vladimir Putin. But the Micex has since bounced back, up 22% over the past 12 months to 2,271.

The economic benefits of hosting a World Cup may be short-lived, but fundamentals for the Russian stock market seem positive.

“Russia still looks cheap, with the RTS Index currently offering a price/earnings ratio of 7.7x, compared to the MSCI Emerging Market index’s 16.5x. Russian-listed companies also provide strong average dividend yields of 5%, and payout ratios are expected to increase from 37% to 50%,” said Elio Manca of ITI Funds, who provide Russian equity ETFs.

And it is no longer just about oil and gas companies either -  energy stocks still make up around half of the constituents in the RTS Index, but there are a growing number of consumer firms for investors to tap into.

Matthias Siller, manager of the Baring Emerging Europe investment trust (BEE), said that Russia’s economic revival should be supported further by rising consumption and the return of investment, with the country’s social media, IT and internet sector placed to be one of the main beneficiaries.

How to Invest in Russia

Morningstar fund analysts believe that Russia is a market best accessed through actively managed funds. Passive funds tend to be too heavily invested in oil and gas funds, not offering investors sufficient diversification.  However, fund analysts do positively rate four Russian equity funds, with the highest rated being the Russian Prosperity Fund, which despite having quite a high annual fee of 2.46% earns a Morningstar Analyst Rating of Silver.

Morningstar analyst Ronald van Genderen says the Prosperity fund is a favourite for investors seeking Russian equity exposure.

“This fund's strengths are many, starting with its well-resourced and experienced team,” he explained.

“We maintain our high opinion of the team despite two analyst departures in the past five years, as both analysts have been replaced swiftly by established professionals. We also think highly of the thorough, research-based process.

“The goal is to pick long-term winners with a wide margin of safety. To help drive its firms to succeed, the team pushes companies to become more effective and investor-friendly. In keeping with this ethos, the role of small caps is much bigger here than in its typical peer. The portfolio has a hefty weighting in the consumer defensive sector and tends to have a large underweighting in energy.”

 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article
Security NamePriceChange (%)Morningstar
Rating
Russian Prosperity (Luxembourg) A USD100.73 USD1.00
About Author Emma Wall

Emma Wall  is Senior International Editor for Morningstar