Henry Kirby in London -

Investors could achieve returns of up to 50% on Russian equities in 2015 if tensions in eastern Ukraine abate and current sanctions are lifted, predicts Russian investment bank Renaissance Capital (Rencap).

Speaking to bne, Charles Robertson, Chief Global Economist at Rencap, argues that, “Russia may well offer some of the best returns you will get in 2015... The ruble is oversold, the market is down, heavily, and we assume that sanctions will ease in 2015. So, there’s very good reason to see the market rising.

“We’ve been talking about a 25-50% improvement. Certainly, buying when markets have been hit hard or currencies are cheap is very attractive. You could get 20% on the currency [regaining value against the dollar] alone,” he says.

As the bne:Chart shows, Russia continues to boast a low forward price/earnings ratio, a measure that compares a company’s share value with its profits. Recently the RTS index, Russia's leading dollar-dominated stock market index, had a P/E of 5, which would mean that a buyer pays $5 for every $1 of earnings. Compare that with the FTSE 100’s P/E of 15.3 and Russian equities look very cheap indeed.

High dividend yields on Russian equities also make the market attractive to longer-term income investors, with yields sitting at around 4-5%.

“When you have dividend yields that high and p/e ratios that low, you’re talking about a market that is incredibly cheap, and markets that are very cheap have a tendency to rebound once people decide that things aren’t quite as bleak as they expected,” Robertson says.

Volatility in the Russian market has led to huge returns for investors in the past. The value of the RTS more than doubled between December 2008 and December 2009, when its value rocketed from 644 points to 1450, but the index has subsequently fallen back again and was trading at 1,001 at the time of writing on November 14 because of the tensions with the West over Ukraine and the non-stop bad economic news domestically.

As Robertson explains, prices could fall lower still, if the conflict in Ukraine worsens. “If we see an escalation [in the current conflict], then there would be an intensification of sanctions. The market has assumed that we now have a frozen conflict – that’s the consensus – but if we don’t, then the market has to take another leg down," says Robertson.

“Prices rose April to July on hopes that east Ukraine would fall to Kyiv and Putin would settle for Crimea. But then they fell when Putin sent 4,000 troops in, sanctions intensified and then kept falling as the oil price fell.”