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December 08, 2014 at 08:20 PM
With oil prices falling, sanctions starting to work their way deeper into the heart of the Russian economy and the government’s warning last week that a recession is imminent, there’s good reason to believe that Russian stocks could become even cheaper than they are and have been for quite a while.
And yet most investors are not likely to be taking advantage of those sharp discounts. Since the onset of the Ukraine crisis, many investors have been leery of Russia and here are some reasons why, in the broader scheme of things, they find the Russian market unattractive.
Russia lacks proper policy and internal momentum at a time of economic troubles
For Stuart Quint, senior investment manager and international strategist at Brinker Capital, there’s a fine line between the point at which cheap stocks offer value and their prices indicate a complete meltdown. And in the case of Russia, he said, “the discount rate could actually be pushed higher in the near term, because of what’s happening both internally in Russia and what’s going on globally.”
At the macro level, the sanctions are likely to further impact the Russian economy unless its political stance changes, but for Quint, the greater concern is the fact that “there’s a lack of internal momentum in Russia.”
Institutions and policies remain extremely weak, he said, and look like they will be eroded further. The inner circle of President Vladimir Putin is tightening and that has repercussions for the rule of law and corporate governance, both of which are already questionable.
“It’s really hard to think about valuations being attractive when you know that discounts are due to issues like these and because of the political and economic situations,” Quint said.
The Russian economy is also tipping into recession, not just because of the decline in energy prices (Russia is heavily reliant on revenues from energy exports) but also because “a lot of major investment projects by both Russian and other oil companies that were about to ramp have been delayed or canceled, so the business climate is clearly deteriorating,” Quint said. With the ruble also sinking to new lows, things are getting increasingly tough for Russian corporates, he said.
Russia is moving farther away from the West
For Ben Rozin, senior analyst and portfolio manager at Manning & Napier, politics is one of the most important issues when it comes to Russia.
