For years Russia has been a boon to energy-centric investors and emerging market nuts, but with the Kremlin’s increasingly belligerent attitude toward western investors, is it time to take the R out of BRIC?
“I would be very hesitant to adopt new positions in the Russian market,” says Bob Gorman, TD Waterhouse’s chief portfolio strategist. “The recognition of Georgia’s two breakaway regions — South Ossetia and Abkhazia — has given rise to concerns about tension with the west.”
It doesn’t help that the country’s stock market has been tanking of late, either. Since Russia’s investing landscape is so tied into energy, when oil prices dropped from $147 to $115, the markets went south as well. From July 1 to August 28, the Russian stock market has fallen 31% — a two-year low — while the U.S.-dollar-denominated index is down 30.2%.
Som Seif, CEO of Claymore Investments, which runs the Claymore BRIC ETF, has mixed feelings on Russia. He says the country has solid assets and it still has a lot of growth potential, but the political situation is a “long-term negative” play.
“They’ve got great assets, but if the commodities take a turn, or if people start to get negative on the country, then things could backfire,” he says.
Russia only makes up 4% of Claymore’s BRIC ETF, which is partly due to the country’s political problems. Seif says his firm only invests in companies that are listed with the SEC or traded on the Global Depository Market. Because of Russia’s protectionist stance, many of its businesses aren’t looking for money outside its borders.
“Politicians are saying, ‘stay in Russia and raise capital here. You don’t need to rely on the U.S. or Europe’,” says Seif. “That’s affecting the number of companies we can invest in.”
Still, Seif is more positive on Russia’s fortunes than Gorman. “There are energy companies, materials, things like that,” he says. “There are very attractive assets there right now.”
While that may be true, shareholders should keep in mind that Russia’s never been particularity adept at investor relations. The government has taken over companies when they get too big and taxes businesses in a seemingly arbitrary way. “If you layer this on top of the political tension we’ve seen, it makes people much more leery about putting money there,” says Gorman, who doesn’t have any direct plays in Russia, though he might have some indirect investments through TD’s emerging markets portfolio.
What happens if energy prices rise and Russia’s stock market climbs? Would that balance out the poor political situation? Gorman doesn’t think so. “Valuations can get awfully compelling on paper but you want to ensure you get your return on capital,” he says. “If the price of oil goes up that would have a beneficial impact on the Russian market, but it would still be assigned a political risk discount.”
Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com
(08/28/08)