Mobius: Taking a closer look at Russian markets
This post is a guest contribution by Dr Mark Mobius, executive chairman of Templeton Asset Management.
During 2008, Russia was among the weakest stock market performers in the emerging market universe, losing more than 70% in US$ terms. But this year, the market has staged an impressive rally surging nearly 100% in the year-to-October period. The Russian market is among the cheapest in the emerging market universe and is trading at a discount of around 50% to its counterparts.
Today, Russia and many other emerging markets are now being driven by an excess in money supply in the international markets which means that these markets are experiencing an inflow of money for investments. Consequently, as Russia was more depressed than other markets, the upside is greater. At Templeton, we continue to find attractive opportunities in most sectors despite the recent rally as valuations remain undervalued. The Templeton Emerging Markets team continues to study individual companies and maintain a long-term investment outlook. Of course general factors such as trends in regional consumer expenditure, commodity prices and corporate governance policies are also taken into account.
We believe that Russia’s equity markets are poised to climb significantly higher because even among Russia’s blue chips you can still find undervalued stocks relative to global and sector peers. Take for example, Gazprom and Lukoil. Gazprom is the largest producer of gas in the world by reserves and production. The company’s reserves account for nearly a fifth of the world’s supply. It is also the biggest gas supplier to Europe and makes up for a majority of the gas production in Russia. Its valuations, however, remain extremely attractive with a P/E of just 4.5x and P/BV of 0.9x.
Lukoil is the second largest vertically integrated oil company in Russia and one of the largest in the world in terms of reserves. The company is engaged in exploration, development, production and refining of crude oil and marketing and distribution of crude and oil products. Lukoil is also trading at very attractive valuations with a P/E of 5.3x and P/BV of 1.0x.
However, there are still risks involved with Russia. The short-term risk is a downturn in money supply and a political event which could impact market sentiment while in the longer-term, it is a change in government attitudes towards privatisation and a market economy.
There are some sectors that we prefer over others within Russia. At the moment we like commodities and in particular the oil companies. We also like consumer sector given that it is a growing market in Russia. In particular we are finding good value in consumer products and distribution companies.
In general, our long-term outlook for Russia remains positive. The country has the world’s third largest foreign exchange reserves at more than US$400 billion. Meanwhile, inflation has been trending down and due to timely and adequate support from the government to the domestic banking system, a new equilibrium for the Ruble has been established. As a result, the authorities were able to cut interest rates. Moreover, Russia owns large proportion of the world’s natural resources and many of the country’s commodity companies are among the world’s low-cost producers.
Last but not least, it is interesting to note that based on current valuations, the Russian market is among the cheapest in the emerging market universe. With Price to Earnings (P/E) of just 9.8x and a Price to Book Value (P/BV) of just 1.2x, the Russian market is trading at a discount of about 50% to its emerging market counterparts. This gap should eventually narrow, which is why we believe that Russia could outperform its emerging market peers in the future. In addition, Russia is also trading at a discount to its BRIC peers (as represented by the MSCI BRIC index), which have a P/E of 15.8x and P/BV of 2.2x. Thus, the Russian market has significant upside potential and remains an attractive investment destination.
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Source: Mark Mobius, Templeton Asset Management – Emerging Markets Overview, November 11, 2009.
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