|29 May 2012|
We keep coming back to the theme of how relatively inexpensive Russian stocks are, but they have reached a new nadir with an average price/earnings ratio of 4.3, which even by Russian standards is ridiculously cheap. By comparison, the MSCI EM Index trades at a forward P/E of 11.7.
For most of the last year, these low prices have been somewhat justified by the fear stalking the global markets and the political limbo caused by the twin elections of "Mutin". However, now the election season is over, this factor should recede and Russian equities should start to re-rate, back to just "cheap".
The inimitable Chris Weafer, chief strategist at Troika Dialog, laid out in a note this week that the "valuation gap" between Russia and the rest of the EM universe assumes the following:
1. A deterioration in the macro trend and the country's fiscal position. "There is no material current evidence of this."
2. An increase in the threat of political instability. "The formation of the new government actually ends the long hiatus."
3. A collapse in earnings. "The first-quarter data is either in line with forecasts or better than expected."
4. A collapse in the oil price. "The risk premium has shrunk but there is no significant risk of a collapse below $90-100/b for Urals."
Weafer goes on to say that, "the irrationally excessive sell-off in most of the Russian equity universe has now started to expose some investment gems." As such, he believes the best stocks to be positioned in for both the expected contraction of the Russia "discount" and the global market rally are domestic theme stocks in the media, IT, retail, transport, banking, real estate, construction and pharmaceutical sectors.