By Michael Patterson, Alex Nicholson and William Mauldin
May 21 (Bloomberg) -- Russia is sliding into its first recession since 1999, companies are struggling to repay $147 billion of foreign debt this year and corruption is the most widespread among the world’s biggest economies.
For BlackRock Inc., there isn’t a better place to buy emerging-market equities. The manager of $1.3 trillion has been purchasing banks and commodity producers, helping spur a 62 percent rally in the benchmark RTS Index this year.
BlackRock’s Plamen Monovski, Templeton Asset Management Ltd.’sMark Mobius and billionaire Kenneth Fisher are all looking past the economic crisis to buy shares trading at the lowest price-earnings ratios among the 50 major markets. They say shares will keep rising as expectations of a global recovery lift oil prices and lure overseas investors back to the largest energy exporter.
“A lot of things were priced for bankruptcy,” Monovski, an emerging-markets money manager at BlackRock, said in a phone interview from London. “All you need in Russia is a rally in commodity prices and the outlook for the economy changes pretty quickly.”
Russia is the main “overweight” holding in BlackRock’s emerging-market funds, Monovski said. He declined to say what companies the firm is buying.
Lukoil, Sberbank
The RTS Index tumbled 80 percent from an all-time high in May 2008 to its 2009 low in January, sending the gauge’s price- earnings ratio to 2.6, the lowest since Bloomberg began tracking weekly data in January 2002. Even after the rebound, the measure is valued at 5.7 times its companies’ profit from the past 12 months, about three-quarters of the monthly average since 2002.
“Russian stocks are still of good value,” Singapore-based Mobius, who as Templeton’s executive chairman oversees about $20 billion of emerging-market assets, said in an e-mail. “They have risen dramatically from their low point but they are still a long way from their previous high.”
OAO Lukoil, the country’s second-largest oil company, trades for 4.7 times profit, below the multiples of 8.1 for the MSCI Emerging Markets Energy Index and 8.9 for Petroleo Brasileiro SA of Rio de Janeiro, according to data compiled by Bloomberg. OAO Sberbank, the biggest lender, is valued at 6.8 times profit, less than half the 13.7 ratio for emerging-market financial shares as a group. Both Lukoil and Sberbank are based in Moscow.
Profit Drop
Russian earnings may tumble 60 percent in 2009 before rebounding by 16 percent next year, according to forecasts from Citigroup Inc. in New York. That compares with a 26 percent decline this year for developing nations as a whole, and an 18 percent increase in 2010.
Investors fled last year, taking capital outflows to a record $132.7 billion, as the country’s main export blend of oil declined as much as 77 percent from a July peak. A five-day war with Georgia in August increased speculation that overseas companies would reduce investments, after the conflict was condemned by the U.S.
Russian corporations slashed output and cut staff after the collapse of New York investment bank Lehman Brothers Holdings Inc. froze global credit markets.
In December, Moscow-based Finance Leasing Co. became the first state-run company to default on a foreign-currency coupon payment in more than a decade. The nation’s businesses have more than $30 billion of foreign-currency debt due this quarter, according to central bank data.
Ruble Rebounds
The ruble’s 14 percent rebound against the dollar since January is also eroding the competitiveness of non-energy businesses in Russia and risks pushing the country back to a “boom-bust cycle,” Roland Nash, chief strategist at Renaissance Capital, said in an interview from Moscow today.
The economy will contract by at least 4 percent this year and may shrink as much as 8 percent, Economy Minister Elvira Nabiullina said in a May 19 interview with Bloomberg Television. About 30 percent of gross domestic product comes from oil and natural gas, Energy Minister Sergei Shmatko said April 9.
“Russia is largely a call on whether you’re positive on energy or not,” said Hugh Hunter, who oversees about $2.2 billion as chief executive officer of Blackfriars Asset Management in London and holds an overweight position in Russian shares. “We will see the oil prices inching up in a reasonably steady way.”
Oil Recovery
Urals crude has climbed 42 percent this year on expectations government stimulus packages and interest-rate cuts from the U.S. to Brazil and China are easing the worst global recession since World War II.
A recovery in oil prices helped Russian stocks rebound from the nation’s 1998 default on $40 billion of domestic debt, a 71 percent devaluation of the ruble and a 6.5 percent contraction in GDP.
Urals crude jumped 138 percent the following year, helping the economy grow 6.4 percent. The RTS almost tripled.
“Investors that are still sidelined will gradually come back,” said Andreas Gummich, a senior strategist for emerging markets at DWS Investment GmbH in Frankfurt. “Despite all the definite risks in the economy, we find value in the Russian equity market.”
For Aberdeen Asset Management’s Mark Gordon-James, many corporate executives aren’t trustworthy enough for him to buy shares. The country makes up just 2.5 percent of Aberdeen’s emerging-market fund, compared with the nation’s 6.7 percent weighting in the benchmark MSCI Emerging Markets Index.
Corruption a Problem
Russia ranks 147th among 180 countries in Berlin-based Transparency International’s 2008 Corruption Perceptions Index, which collects data on bribes from surveys of local business leaders, international aid organizations and country risk experts. China ranks 72nd, Brazil is 80th and India is 85th.
“Reforms take a long time, and we don’t see any signs of positive momentum on this front,” Gordon-James said in an interview. State intervention into markets also makes Russia unattractive, according to the London-based money manager. Aberdeen oversees about $138 billion worldwide.
Prime Minister Vladimir Putin accused steel and coal producer OAO Mechel of price fixing on July 24, and four days later he said the company used offshore traders to minimize taxes. His criticisms wiped out about half of Mechel’s share price and more than $60 billion from the Russian stock market.
Gazprom’s Strategy
OAO Gazprom’s strategy of purchasing gas from central Asia and selling it to Europe is another reason investors should be cautious, according to Alexander Nazarov, an analyst at the Metropol brokerage in Moscow.
The transactions by Russia’s biggest publicly traded company are unprofitable, said Nazarov.
While corporate governance is lacking, Russian equities are still worth owning because global stocks are in the early stages of a bull market, according to Fisher.
The nation’s shares will outperform during the global rally because they fell disproportionately last year, Fisher said. The RTS Index dropped 72 percent in 2008 and was the worst performer among benchmarks for the biggest equity markets, Bloomberg data show.
“Russia in some ways today is just a levered play on the world,” said Fisher, who oversees about $24 billion as the CEO of Fisher Investments in Woodside, California. “Early in a bull market, Russia is going to run more.”
Cash Flows
Investors have poured less money into Russia this year than into Brazil, India and China. The four countries are grouped together under the BRIC acronym coined by Goldman Sachs Group Inc. in November 2001 to encompass four developing nations it predicted would join the U.S. and Japan as the world’s biggest economies by 2050.
Funds that invest in Russian equities attracted $338 million so far this year, according to Bank of America-Merrill Lynch Research. That compares with $3.2 billion of inflows into China funds, $2.3 billion into Brazil and $342 million into India.
The inflows helped push the price-earnings ratios for China’s benchmark Shanghai Composite Index and Brazil’s Bovespa index to 27 and 21, respectively, Bloomberg data show. India’s Bombay Stock Exchange Sensitive index is valued at 15 times profit.
Brazil’s economy may contract 1.3 percent this year, China’s may grow 6.5 percent and India’s may expand 4.5 percent, according to forecasts from the International Monetary Fund in Washington, which was formed after World War II to help stabilize the currencies and economies of member countries.
“People have been obsessed with that growth despite what they have to pay,” said BlackRock’s Monovski. “The potential for higher valuations in Russia is far from exhausted.”
To contact the reporter on this story: Michael Patterson in London at mpatterson10@bloomberg.net; Alex Nicholson in Moscow at anicholson6@bloomberg.net; William Mauldin in Moscow at wmauldin1@bloomberg.net
Posts
No comments:
Post a Comment