Russia Markets: Putin Is Still Here -- Get Over It and Look for Bargains

By Craig Mellow  FEB 29, 2012 4:25 PM

Russia's politics may be stagnant, but its companies are not.


For a guy about to win a landslide election victory, Vladimir Putin is the subject of a lot of political eulogies these days. The most pessimistic polls may show the Russian leader with a 3-to-1 edge on his closest opponent in this Sunday’s presidential election.

Anti-Putin activists in the streets may have curtailed their own expectations to seeing him replaced, by some unspecified mechanism, sometime during his new six-year term. That didn’t stop Bloomberg Business Week from publishing a cover story on how Putin’s “days are numbered” or the Wall Street Journal from heralding the “After Putin” era. (The New York Times, which has found its best Moscow correspondent in years in Ellen Barry, is offering more measured an incisive coverage.)

The good news for investors is they may be able to make money on the Putin buriers’ wishful thinking. Putin will soon return comfortably to his old chair at the Kremlin, the marches against him will likely die down, and Russia will be re-rebranded as an ordinary emerging market with some strong points in its favor.

One reason for buying Russia now is knee-jerk. The price of Brent crude oil has risen by 8% this year, and between US economic recovery and jitters over Iranian supply, it looks set to remain firm. That can’t help boosting blue chips like state oil giant Rosneft (ROSN.ME), which has advanced 14% since January 1.

The second reason is less obvious but more persuasive: Russia’s political stasis and often backward-looking political rhetoric mask a dynamic corporate sector that is bent on modernization and growing like a house afire as a result.

Goldman Sachs (GS) expects profit at publicly listed Russian companies to leap by 27% a year from 2011-13. That’s the best projection in the BRIC, beating China’s 24% expected average earnings growth and dusting India’s 18%.

How do corporate profits jump 27% annually when gross domestic product is puttering along at about 4%? Russia’s consumer sector is rebounding faster than the economy as a whole, for one thing. Retail spending rose by more than 7% last year, and bank credit by some 25%. Immature service sectors are still being rapidly consolidated, spurring outsized expansion by listed store chains like Magnit (MGNT.ME) and Dixy (DIXY.ME).

A post-Soviet management generation has also come of age, loaded with multinational corporate experience and prestigious Western MBAs. The disruptions of 2008 brought this cosmopolitan crew to leadership positions even at dinosaurs like state-owned Sberbank (SBER.ME), and they have a fertile field for increasing efficiency and margins.

Considering this corporate ferment, Russia’s stock market looks cheap on its face. Not as cheap as two months ago. It has jumped by a quarter this year, as the twin terrors of local anarchy and eurozone meltdown have eased.

But the benchmark RTS Index is still off 14% from a year ago, and average price/earnings ratios languish below 6. That is about the same as it was in 1999, when Russia was limping out of a sovereign debt default and really was threatened with anarchy. It compares to an average P/E above 11 for Brazil and 16 in India.

Disconnects between earnings and share performance range across the Russian economy. Dixy, one avatar of a new-economy growth company, doubled revenue for the first nine months of last year and rebounded to a profit after losing money in 2010. Its shares nonetheless slid 7% over the past 12 months.

Sberbank more than doubled net income in 2011; its stock is down more than 9%. Shares of Bashneft (BANE), a formerly sleepy oil company that has been revamped by a management team from Moscow-based holding Sistema, have gained 25% over the past year. But 2011 profit jumped 52%.

It’s reasonable to say that emerging markets in general were overhyped and due for a comedown back in March 2011. But emerging markets in general have slumped about 6% in the year since then, less than half of Russia’s drop. There is something investors particularly don’t like about Russia, and some of it has to do with one-sided publicity that makes the place sound like North Korea only more volatile. The smart fund manager will dig deeper.


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Rosneft steps on Gazprom’s toes with natural gas plans.
No positions in stocks mentioned.

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