Russia may be one of the world’s fastest-growing capital markets, but it’s also the riskiest, writes Patrick Donovan
Financier George Soros overstretched his talents with his latest sortie into the book-publishing world. But anybody prepared to wade their way through the billionaire investor’s biography Soros on Soros will at least come away with an understanding about why Russia is becoming the financial world’s hottest “emerging market”.
Far from providing any detailed insight into how he reputedly broke the Bank of England with his currency dealing, Soros’s book boils down to the single principle that money can only be made by betting against the trend.
Russia provides a textbook example, with war in Chechnya dominating the news and rumours continuing to circulate about President Boris Yeltsin’s health.
So low has public confidence dropped in Russia’s ability to pull itself out of the economic mire, that this “Soros factor” has started to fuel intensifying interest by investors looking to buy into what could be the bottom of the market.
The hype was reinforced with the appointment of the relatively youthful Vladimir Potanin to take over the country’s economic team.
Credited with building up the commercial bank, Uneximbank, into the country’s fourth-biggest investment institution, he is seen as a vocal champion of the market economy, with a determination to reform the regulatory uncertainty that continues to spook overseas investors. Russian shares duly rallied, leaving them just 10 percentage points under the high they touched after Yeltsin’s re- election. The appointment comes when the tally of overseas money dribbling into Moscow has passed the $1,75-billion level.
This may be small beer compared with investment ploughed into the Tiger economies of the Far East. But in absolute terms Moscow represents one of the world’s fastest-growing capital markets.
The investment case is that Russian stocks, particularly in the natural resource sector, are undervalued at a time when its economy is on the mend. While Far East markets are trading on 30 times earnings, Moscow shares are valued on a multiple of three. Even factoring in political risk, enthusiasts point out that this natural resource sector, at least, is underpinned by huge reserves. Whatever its other very real problems, Russia still controls nearly one-fifth of the world’s gold and silver deposits, more than 10% of its oil and about half its coal reserves.
At the same time, efforts to grapple with its chronic economic problems have seen inflation fall from a 1994 high of 302% to this year’s forecast 30%, according to bankers ANZ. Efforts to improve the auditing of Russian companies and tighten up the running of the Moscow stock exchange have improved the credibility of its blue-chip companies to the extent that a few of its resource-backed oil and mineral firms are in the process of getting ADR listings on Wall Street. None has yet applied for a City share-listing, but this must be only a matter of time.
Over the next few months, it looks like a growing number of funds — such as Fleming, which published highly bullish research on the Moscow market, and Regent Pacific — will be targeting London for Russian investment prospects.
Regent, which claims to be the biggest investor in the country’s capital market, already has $400- million in it. And it is looking to double this over the next 12 months. Its flagship Red Tiger fund has outperformed the market index by nearly 130%. Besides institutional investors, Regent is planning to sound out financial intermediaries with a view to setting up funds aimed at the private investor.
To the adventurous it is worth a punt. But there is another basic investment principle not mentioned in Soros’s book: that of not risking money you cannot afford on what must be the world’s riskiest market.