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Why Are Russian Stocks So Cheap?

It’s understandable … every now and again we are likely to hear somebody get bullish on the Russian market again, especially when it is one of the cheapest in the world at current prices.  So why have prices stayed so low, and why are so few investors willing to pack their portfolios with Russian exposure?  This briefing note at the FT cites at least two reasons:  big time worries over political risk and corporate governance, and reluctance on behalf of Russian consumers to start buying.  It can be hard to buy things or invest in your own business if you can’t be sure you can keep it.

Consensus economic growth forecasts have ticked up to 4 per cent, and might prove lightweight if consumers start spending again. Real incomes actually grew 1.9 per cent last year, but nervous Russians hoarded them; the savings rate doubled from July 2008 to 14 per cent by end-2009. A fall to, say, 9-10 per cent would pump a lot more spending into the economy.

With oil prices still below pre-crisis highs, and Gazprom’s export outlook murky, investor interest is shifting from oil and gas to consumer-led stocks – retail, mobile telecoms and consumer goods. Meanwhile, government plans to pour resources into rebuilding clapped-out infrastructure could favour power companies and some materials suppliers.In spite of all these opportunities, Russia’s stock market, on a forward price/earnings basis, remains among the world’s cheapest; its rating is around half that of some emerging market peers, a larger discount than can be justified by political and corporate governance concerns. As long as investors remain skittish about broader risks, however, Russia may remain out in the cold.