The past few years have barely seen Russia out of the headlines, with events on both sides of the Atlantic shaping the conversation around the vast country. However, amid the noise, many investors are still ignoring a glaring opportunity, having been deterred by the geopolitical climate and resulting sanctions placed on Russia. Yet, there has never been a better time to invest in this market.
For several reasons, Russia presents a much safer prospect than in recent years. The Russian economy is on the road to recovery, aided by oil and rouble stabilisation. 2018 also proved a positive year with several rating agencies, including S&P Global, strengthening their outlook on sovereign credit for Russia. This is evidence that the country is on a stable footing and primed for foreign investment.
By the end of the 2020 many Russian publicly traded companies will finish investment programs and enter the stage of >10% free cash flow yield. Already high dividends are projected to increase substantially up to double digit yields for the majority of stocks.
There are ongoing efforts in the implementation of crucial reforms and positive shifts in the Russian investment environment. For example, the government has already started the unpopular, but much needed pension reform and VAT raise. The introduction of a wider privatisation programme and higher dividends from selling off state-owned enterprises should also support the Russian market in the medium-term.
Russia has already ridden out the worst of the impact of the recent sanctions and, as these continue to ease, it will stimulate capital flow to both the real economy and financial markets. Additionally, a forward-thinking strategy suggests that there is a higher probability of renewed dialogue with the West, rather than the relationship deteriorating any further. We already see softening in sanction pressure and recent sanctions lift from Rusal confirms our point.
In this context, an event-driven strategy remains one of the best performing styles of investing, providing stable returns compared to other strategies. It's a tactic that thrives by taking advantage of stock mispricing associated with corporate events; given that Russia's economic recovery is fostering many corporate activities, such as debt restructuring, company reorganisation, asset divestitures and M&A deals, an event-driven strategy is particularly well-placed to capitalise on the current market conditions in Russia today.
Sophisticated investors are of course no stranger to the benefits of emerging market exposure in their portfolios. However, the Russian market continues to be overlooked - largely because it is misunderstood. Entering the market with confidence in its future stability as well as the right hedge fund strategy is key to maximising potential.
David Amaryan is the CEO and founder of Balchug Capital