Feeling contrary? It may be time to snap up Russian shares

Is this the minute of “greatest pessimism” for Russian investments?


If you are a real contrarian, shouldn’t you be getting shares in Russia?

Contrarianism involves not following the crowd. When absolutely everyone is buying, a contrarian sells. When everyone is promoting, a contrarian buys. With sentiment so low, is now the time to acquire into this commodity-rich nation?

The time to purchase an investment is at the stage of “maximum pessimism”, according to legendary contrarian investor Sir John Templeton. This technique launched Sir John on the road to billionaire status, soon after he snapped up battered shares in New York throughout the Fantastic Depression in the 1930s – and latest historical past has proved his level.

The very best time to get shares in the last 10 many years was on March 3, 2009, the day the FTSE bottomed for the duration of the monetary crisis. Nonetheless, quite number of folks did so because they have been as well afraid of what would come about in the long term. The banking system was in danger of collapse, nations were in danger of going bust and companies have been issuing revenue warnings at an astonishing price – but brave contrarians who purchased at that time now sit on substantial gains.

Traders have been withdrawing income from Russian investments as tensions between the West and Russia boost more than Ukraine, sending valuations plummeting. Russia’s central bank has exposed that net capital outflows reached $ 75bn (£44.7bn) in the first half of the 12 months, which was much more than the entire figure for 2013, which stood at $ 62.7bn.

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As a consequence, Gazprom, which holds the world’s biggest gas reserves, is trading on a recent 12 months earnings a number of of a mere two.7 times. Oil group Rosneft trades on an earnings multiple of four.four, with banking giant Sberbank trading on just 4.6 instances expected earnings. Shares in all these firms can be purchased through the London Stock Exchange – but have we reached the point of highest pessimism however?

The sanctions imposed by the West are not really expected to hurt Russia too a lot. Final week, the Global Energy Agency (IEA) argued that EU and US sanctions would have hardly any impact on Russian energy businesses – the most crucial element of its economic climate.

“Neither set of sanctions will have any tangible close to-phrase impact on supplies. Even for the medium phrase, their impact seems questionable,” the IEA mentioned. “EU sanctions are very selective, exclude agreed contracts, and can only be extended previous one 12 months by consensus. Their ‘perimeter’ seems loosely defined, possibly leaving space for finding approaches close to the most constraining measures.”

Traders in Russia’s two largest banks – Sberbank and VTB – also had some thing to cheer last week. Index group MSCI made a decision to preserve the banks’ shares in an emerging industry index – as extended as the two state-controlled banking institutions did not problem any far more equity.

Development in the economic system is currently fading, with GDP in the 2nd quarter increasing just .8pc, beneath the Russian economic ministry’s prediction of one.1pc and the .9pc witnessed in the first quarter.

Factors are also very likely to get worse as Vladimir Putin’s ban on fruit and vegetable imports bites. This is certain to lead to shortfalls of some merchandise and, eventually, stoke inflation. With inflation currently sitting at a painful seven.5pc in July, this could hit the economic system tough.

Stress on the rouble from capital flight has presently resulted in the Russian central bank rising curiosity prices 3 times this year.

“Inflation dangers have improved due to a mixture of aspects, such as, inter alia, the aggravation of geopolitical stress and its prospective impact on the rouble exchange rate dynamics, as well as possible alterations in tax and tariff policy,” the Russian central bank explained. A decrease rouble offers further undesirable news for inflation, as the price of imports rises as a country’s currency weakens.

Russian shares have been always inexpensive for a reason – and now there are much more reasons for them to keep low-cost. In reality, there is a true likelihood that they could get more affordable still need to fighting in Ukraine intensify. This indicates that the country could be a worth trap. This is in which investors purchase into shares that appear to signify excellent value, but that worth by no means actually seems.

Many traders will presently have exposure to Russia anyway because oil key BP is a single of the most broadly held shares in the Uk – and BP owns nearly 20pc of state-owned Rosneft.

All of this indicates that, on any wise metric, Russia must be regarded as as under investment grade. Buying Russia shares is not an investment: it is a punt, a gamble, a bet. Regardless of the risks, however, the predicament is a textbook illustration of contrarian investing. But a single that actually is only for the brave.

Garry White is chief investment commentator at Charles Stanley