Russian equities offer more than just discount, says Arbat Capital

Buying cheap Russian equities is not necessarily a smart stock picking move, says Yulia Bushueva, managing director at Arbat Capital.

This choice is driven first and foremost by the misconceptions about Russia’s equity market, which burden foreign investors.

These misconceptions lead to inappropriate equity selection decisions, or, even worse, causes investors to stay away from Russia’s market altogether.

However, the local market has a lot more to offer than just cheap stocks. There are compelling investments opportunities in companies with solid management and a propensity for reform and innovation.

In her column in the Forbes magazine, Bushueva tries to dispel the myths that stop investors from selecting such stocks.

She addresses the issue of misunderstanding the origins of the discount on Russian equities and the impact this has on the market.

Brokers often argue that the Russian market, the cheapest of all the emerging markets, will grow more than its peers in a rally.

Bushueva (pictured) disagrees. She writes: “Don’t be swayed by this argument, used by brokers to try and sell local securities. The discount of Russian equities relative to other markets has almost always existed.”

She sees two main reasons for this: the dominance of oil stocks and the inconvenience of investing in Russia for US and Asian investors.

She says: “It is much easier for US and Asian investors to spend money on the more understandable Chinese or Brazilian equities, which are right on their doorsteps.”

On top of this Russian oil stocks, which make up around 70% in most Russian equity indices, trade at a significant discount to consumer stocks.

This is easy to understand. After all, new oil deposits are not discovered as often as new shops are opened, so investors naturally feel more inclined to invest in retail companies than in oil giants.

Russia has the reputation of “one large oil player dependent on global oil prices”, Bushueva says.

This, however, is also a misconception, in her view, since correlation with oil prices is lower than people think.

In Forbes she writes: “Of course, if you believe the oil price will drop to $50 per barrel, it is time to sell Russian equities. But a price increase to $150 per barrel is not at all a signal to buy.

“The global economy is in crisis mode and is unlikely to be able to deal with such a price level. It would cause all risky assets, including Russian equities, to decrease in value.”

Bushueva also points out that political conditions in Russia have a far greater impact on the local equity market than oil price fluctuations.

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