Russia — the one-eyed emerging market among the blind

August 16, 2013

It’s difficult to find many investors who are enthusiastic about Russia these days. Yet it may be one of the few emerging markets  that is relatively safe from the effects of “sudden stops” in foreign investment flows.

Russia’s few fans always point to its cheap valuations –and these days Russian shares, on a price-book basis, are trading an astonishing 52 percent below their own 10-year history, Deutsche Bank data shows.  Deutsche is sticking to its underweight recommendation on Russia but notes that Russia has:

“become so unpopular with the investor community that it is a candidate for the ‘it’s so bad it’s good’ club as evidenced by the very cheap valuations and long-term  underperformance.

The real game changer however is outside financing needs. Quite simply, Russia runs a current account surplus and is therefore in a better position than India or Turkey which will face a funding crunch if foreign money stops coming in.

Analysts at Morgan Stanley reckon that out of 20 big emerging economies, Russia is the least vulnerable to the sudden stop syndrome. They point to the following factors:

a)  Portfolio flows between mid-2009-end-2012 rose by just 1 percent of GDP in Russia (10 pct or more in Mexico, South Africa and Turkey)

b) Short-term external debt is less than 20 percent of Russian hard curency reserves (100 pct in Turkey; 35-40 percent in India and South Korea)

c) Russia has a current account surplus of almost 4 percent of GDP  (vs 4.5-6 percent of GDP deficits in India, Turkey and South Africa)

So Morgan Stanley is 250 basis points overweight Russia in its model portfolio and says:

China and Russia are among the countries with the least exposure to the risk of an EM ‘sudden stop’ scenario. Their lower usage of external financing and relatively strong sovereign balance sheets would protect them better than other EM countries, in our view.

Which is not to say Russia has escaped the woes besetting emerging markets. Far from it — the rouble is at four year lows and the central bank has spent billions of dollars in its defence. Russia equity funds have seen outflows of $1.8 billion this year, say banks citing figures from EPFR Global. The country remains reliant on oil; reforms and privatisations have stalled; politics are messy.

But just look around. Other emerging markets are in a tighter spot.

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