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Russia is over-penalised for risk says Pictet Asset Management

17 May 2011

Managers of the Pictet-Russian Equities fund, Hugo Bain and Peter Jarvis, today gave their views on the investment environment in Russia, the risks associated with investing in the region and the booming Russian commodities market at a seminar in London.

 

According to the managers, Russia is one of the cheapest markets in the global emerging market sector based on such measures as p/e and enterprise value to assets. The market is trading 20 per cent below its peak level which the RTS Index reached in May 2008.

 

Peter Jarvis, Senior Investment Manager, Pictet Asset Management, explains: “In our view Russia is over-penalised by international investors due to perceptions of excessive political and governance risk. The reality is that Russia is no worse or better than other emerging economies. Indeed, Russia has a better functioning democracy than most emerging Asian economies, for example.”

Revenues from gas and oil taxation mean that there is very little government or household debt in Russia, issues that the rest of the world are struggling with. The trickle down of this funding is extremely efficient – the money raised by these taxes covers all government spending, and means that income taxes in Russia can remain low.

It is this over-stated view of risk that helps build the current investment opportunity in Russia, as it means that Russian companies often trade at levels which are distressed when compared to similar companies in the developed markets. “Gazprom, for example, is trading on a third of what we believe it would do if it was listed in the West,” adds Jarvis.



Hugo Bain, Senior Investment Manager, continues: “It is true that outside perceptions of Russia are not helped by the legacy of Yukos. Investors believe that corruption has not improved and has probably worsened. However, our observations point to a marked improvement in the quality of management and business transparency.

“Furthermore, President Medvedev has recently recognised that the Russian business environment is poor. He has set a 1 July deadline for Prime Minister Vladimir Putin to oust ministers from the boards of large public companies, renowned for their poor governance and lack of transparency. We hope that this recognition will improve the global standing of companies and promote better governance.”

Russia is home to a vast proportion of the world’s commodity reserves and correlation is high between debt and equity market performance and commodity prices. Future taxation reforms are designed to stimulate investment in other economic areas as it is important for Russia to diversify its economy. Bain and Jarvis agreed that investing in Russia requires a constructive outlook on commodities.

Hugo Bain explained Pictet’s outlook for the region: “Russia is a secular growth story thanks to low penetration, large population and a lack of excess debt. It also has a large internal market. Russia has the largest population in Europe and is already the largest for most consumer goods. Regarding commodities, the eventual return to global growth means that we are likely to return to a period of limited availability and high prices. Russian infrastructure investment will be a key focus, and further investment remains an option for the government if further stimulus spending is required.

“While we recognise the risks associated with doing business in the region, these are somewhat exaggerated in our view. As it is difficult to time the Russian market, investors should treat the market as a highly attractive long-term investment opportunity.”