Russian Stock Market? Jefferies: It could be time to buy Russia again
For the past few years, the Russian equity market has been off-limits for most investors. The round of sanctions placed on the country following its invasion of The Ukrainian territory of Crimea during March 2014, sent shockwaves through Russia’s economy. Over the following 12 months, the country also had to grapple with an economic crisis brought on by the oil price crash.
Economic uncertainty and volatile currency are enough to scare investors away from any country but over the past few months some stability has returned to Russia’s economy and international investors are once again beginning to nibble at Russian stocks.
Russian share prices have started to break out both in local and US$ terms. The leading Russian MICEX Index is up 13.8% year-to-date and up 16.7% over the past 12 months.
Russian Stock Market – Time to buy Russia?
A research note from Jefferies published today claims that now may be the time to buy Russian stocks (again). Analysts at the investment bank point out that although the country remains subject to economic sanctions and the economy is set to contract further this year, the IMF expects the economy to grow around 1% in 2017 while inflation should fall to about 5%. The Russian Central Bank has been extremely successful in curbing the country’s inflation which reached double-digit levels in 2015. According to Jefferies:
“It [the central bank] has won an enormous amount of credibility in the manner in which it managed the drop in oil prices, cleaning up the banking system and providing emergency liquidity when necessary.”
On a valuation basis, the Russian market is attractive. The market trades at a forward P/E of 6.4 and a forward price to book ratio of 0.8. Return on equity is 12.2%, and the forward dividend yield is 4.9%. So, the Russian market offers both income and trades at an attractive valuation – a rare combination nowadays.
Still, as Jefferies points out the Russian market isn’t for the fainthearted:
“Although the weaker Ruble has afforded the economy some competitiveness, global demand remains weak. With wage growth muted, restrained government finances and with the banks faced with a rising tide of nonperforming loans, the recovery in 2017 is likely to be soft compared to previous economic rebounds.”
Russia is an unpredictable nation, and while it may look as if the country is in recovery mode right now, there is still a lot that can go wrong. Granted, the Russian market looks cheap compared to its international peers, although some could argue that this discounted valuation reflects the uncertainty surrounding the country.