A Fund for the World Cup
Written on 10/08/2018

JP Morgan Russian Securities PLC – GB0032164732

Never a market or currency for the faint-hearted, but could possibly all the current news re volatile oil price, questionable corporate governance and uncertain international political relations be in the RUSSIAN price? I believe that some of the more positive factors, itemised below, have been ignored and that some exposure, perhaps through the fund mentioned below could be added at this stage as part of the emerging market allocation.

  • Recent macro statistics have been more stable with steady increases in retail sales, industrial production, construction and corporate lending. GDP growth forecasts are in the 1.5-2.0% area for 2018
  • The CBR is expected to continue cutting interest rates this year and next. Inflation is retreating, from a high level, and surpluses in both current account and Budget are in stark contrast to several other “emerging markets”.
  • Within the banking sector, credit growth is recovering, and non-performing loans appear to have peaked.
  • Recent OPEC/Russia “agreement” seems likely to keep the oil price at a level highly beneficial to major oil companies and State coffers. Energy companies make up more than half of those in the MSCI Russia Index.
  • Earnings per share growth is exceeding expectations.
  • Depending on index sample chosen, a P/E ratio between 6 and 7 and Price Book ratio at approximately 0.7 puts investment ratios are at a considerable discount to the emerging market universe, let alone the global market average. Recent Bestinvest research puts the global equity PE at about 18.5, roughly three times as much as Russia
  • The total Russian market offers a yield of about 5.7%(2.6% global average, source:Bestinvest) as earnings and pay-out ratios continue to rise. According to VTB Bank projections in January 2018, dividends expressed as a percentage of State government revenues are expected to rise from 1% to about 3% between 2016 and 2019.
  • Institutional investors of Emerging markets funds are starting to carry much higher weightings In Russia, by comparison with markets which may be much more highly rated e.g. India, or in political turmoil e.g. Turkey, or have serious economic problems e.g. Venezuela.
  • Current emerging market volatility is being exacerbated by withdrawal of dollar liquidity, rising U.S interest rates and a resurgent dollar with Turkey, Brazil,Indonesia,South Africa and Venezuela often being cited as more “fragile”.
  • Prospective investors could look at individual stocks such as Sberbank and Lukoil or JPM Russian Investment Trust (detailed below). Income seekers may additionally look at the Raven Russia preference share, currently on an 8.1% annual yield, paid quarterly in sterling. 

The instrument described below is speculative and can be highly volatile.

  • The investment trust JP Morgan Russian Securities plc is a UK listed investment trust, which provides pure exposure to the Russian economy and, as at May 31st May, held over 99% of it’s assets in Russian equities.
  • JP Morgan was an early investor in Emerging Europe and the Middle East, and the Russian team is led by Oleg Biryulyov who has over 20 years’ industry experience.
  • As at the same date, the Fund’s major holdings were Gazprom (15.3%), Sberbank (12.3%), Lukoil (10.3%),Norilsk (7.1%) and Novatek (6.5%)
  • Apart from some of the national champions mentioned above, the fund also holds some promising smaller cap ideas including, in the top ten,Ros Agro,a vertically integrated Russian food producer and the second largest player in the domestic pork and sugar markets.
  • As at 18th June,the fund had a relatively low gearing of 2.6%.
  • The trust itself currently trades at 15.6% discount, close to it’s five year low and offers a yield of 4.2%, with the prospect of above average dividend growth.
  • Clearly the trust will be highly sensitive to ongoing geo-political developments and the oil price but might suit a more adventurous portfolio on the current rating.
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