With many markets at high levels there isn't much on offer for bargain hunters. However, Russia's RTS index has been trading on a historic price-earnings ratio of 7.1 times, making it one of the cheapest major equity markets, according to analysts at Numis Securities. And this is despite the country returning to economic growth driven by improvements to business investment and household consumption.
Russia index looks cheap
Higher oil prices
Currency stability
Lower inflation
Russian market can be volatile
Concentrated portfolio
Russian companies are adjusting to economic sanctions targeting areas such as state finances, energy and defence sectors, following Russia's annexation of the Crimea in 2014. And this year the country has benefited from higher oil prices, currency stability and a decline in inflation.
A good way to play this improving situation might be JPMorgan Russian Securities (JRS). The trust has beaten its benchmark, RTS index, and MSCI Russia index over one, three and five years, but is trading at a discount to NAV of nearly 14 per cent. "We see scope for this to narrow if sentiment improves and the trust delivers strong performance, and note that in the past it has traded on a premium," say analysts at Numis.
Oleg Biryulov, who has run the trust since launch in 2002, chooses investments according to their individual merits and looks to hold them for the long-term. He and his team favour companies with good corporate governance and strong balance sheets that they think are good quality and have superior growth prospects.
Holdings include companies with the potential to grow due to their positions as national or global market leaders, including Sberbank (SBER:MCX), which is taking advantage of consolidation in the banking market.
They are also looking to exploit an expected pick-up in domestic consumption, so the trust is overweight consumer companies such as discount supermarket X5 Retail (FIVE) and auto company Sollers (SVAV:MCX).
And to exploit the return of economic growth they have been adding to cyclicals trading on attractive valuations, such as energy company Gazprom (GAZP:MCX).
The trust has a mid and small-cap bias and can also invest up to 10 per cent of its assets in companies operating in countries that used to be part of the Soviet Union. For example, it holds the largest bank in Georgia, TBC (TBCG), which is expected to benefit from the country's fast gross domestic product (GDP) growth and banking penetration.
The trust has an attractive yield of about 4.5 per cent because Russian companies have been increasing their dividends. However, its primary aim is growth, so its ability to pay dividends is likely to fluctuate.
JPMorgan Russian Securities has traded at wider discounts – for example, earlier this year it traded wider than 18 per cent. If Russia doesn't continue to grow and sentiment on this market doesn't improve, the trust's discount could widen again. Although its board considers share buybacks if the discount is wider than 10 per cent it doesn't think they are very effective so doesn't often do them.
Both the Russian market and the trust's returns have been fairly volatile, and it's concentrated portfolio of around 32 investments increases the potential for volatility.
However, the trust has no limit on underweight positions so does not have to hold shares its managers have concerns on.
"We believe that an active approach makes sense when investing in Russia, given the market concentration and corporate governance issues," say analysts at Numis. And they argue that current valuations in the Russian market already price in a lot of bad news as "the dull returns in 2017 do not appear to have reflected the improving economic conditions and a recovery of about 10 per cent in the oil price".
The trust also does not have any debt, reducing the potential for volatility.
So if you have a long-term investment horizon and very high risk appetite, and want to buy into what could be an opportunity for growth at a low price, then a small allocation to JPMorgan Russian Securities might be worth a punt. Buy.
JPMorgan Russian Securities (JRS) | |||
PRICE | 507.25p | GEARING | 0% |
AIC SECTOR | Country Specialists: Europe | NAV | 593.22p |
FUND TYPE | Investment trust | PRICE DISCOUNT TO NAV | 13.89% |
MARKET CAP | £261.8m | YIELD | 4.59% |
No OF HOLDINGS | 32* | ONGOING CHARGE | 1.40% |
SET UP DATE | 20/12/2002** | MORE DETAILS | www.jpmrussian.co.uk |
Source: Morningstar as at 21 December 2017, *Numis Securities, London Stock Exchange.
Performance
Trust/benchmark | 1-year NAV return (%) | 3-year cumulative NAV return (%) | 5-year cumulative NAV return (%) | 1-year share price return (%) | 3-year cumulative share price return (%) | 5-year cumulative share price return (%) |
JPMorgan Russian Securities Ord | 0.64 | 115.69 | 17.55 | 3.93 | 110.13 | 20.31 |
MSCI Russia GR USD index | -3.51 | 91.78 | 12.18 | -3.51 | 91.78 | 12.18 |
RTS RTSI TR USD index | -3.77 | 98.82 | 13.86 | -3.77 | 98.82 | 13.86 |
Source: Morningstar as at 20 December 2017
Top 10 holdings as at 30 November 2017 (%)
Sberbank of Russia | 17.4 |
Gazprom ADR | 14 |
Lukoil ADR | 8.4 |
Novatek GDR | 5.8 |
Norilsk Nickel ADR | 5.1 |
Tatneft including ADR | 4.7 |
Rosneft GDR | 4.6 |
Alrosa | 2.8 |
Polyus GDR | 2.6 |
Magnit | 2.5 |
Source: JPMorgan Asset Management
Sector breakdown as at 30 November 2017 (%)
Energy | 40.2 |
Financials | 21.6 |
Materials | 20.6 |
Consumer staples | 5.7 |
Real Estate | 3.4 |
Health Care | 2.1 |
Utilities | 1.9 |
Industrials | 1.9 |
Consumer Discretionary | 1.3 |
Information Technology | 1.2 |
Cash | 0.1 |
Source: JPMorgan Asset Management