Russia is 40% Cheaper than Other Emerging Markets

Russia has the potential to significantly outperform other stock markets says Morningstar Investment Management's Cyrique Bourbon

Cyrique Bourbon 7 February, 2018 | 1:33PM
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Cyrique Bourbon: Russian equities have been one of the best-performing markets in the last few months. In particular, Sberbank has been a very strong contributor and Sberbank accounts for about 23%, 24% of the Russian Index these days.

We believe the trends we have seen recently can continue in the long run where Russia has potential to significantly outperform other markets globally on the equity side. First reason, its valuations. Russian equities are still about 40% to 50% cheaper than, say, emerging markets equities. And even embedding a level of conservatism we believe the expected returns for Russian equities are still significant.

Secondly, if you think about the earnings picture, there's potential for the portion of the index in Russia, which is about half in energy, the oil and gas companies, those companies have room to significantly increase their earnings and we should see in the coming months and coming quarters that kind of feeding through from higher oil prices into the bottom-line of these companies as their cost base and their currency exposures should constitute a significant tailwind.

So, in short, we remain high conviction in Russian equities for the long term, especially when compared to other markets, such as emerging markets, and we believe the earnings picture should be a significant driver to rerating.

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Cyrique Bourbon  is multi-asset portfolio manager for Morningstar Investment Management EMEA

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