The Russian market has taken a severe hit in recent months, losing 25% of its value between 22 October to 14 November, but analysts are distinctly bullish medium term, with predictions that recent events will prove to be a watershed.

My own view is that October 1997 is going to be remembered as a watershed for Eastern Europe and particularly Russia," says Julian Mayo, director of Regent Pacific Corporate Finance in London. Mayo describes the case for buying the Russian market as compelling.

"In the six years after the 1987 crash, the Asian markets became accepted as havens for institutional mon-ey. In six years' time, people will say that now was the time when we all should have been piling into Russia because of valuations," adds Mayo.

Simon Key, investment dir-ector at Framlington Investment Management in London, says that he is positive on a six-month view while the current problems are "simply contagion from the rest of the world".

Mayo believes that the Rus-sian market has been unduly affected. "The market has fallen because of panicky selling by investors who have been selling other markets but also because the small number of foreign investors in Russia are keen to lock in profits for the year in one of the few markets where this is possible."

Christopher Smart, Mos-cow-based portfolio manager of Pioneering Group's central and eastern European fund agrees with this assessment.

"Russia is one of those odd places where you don't know what is going to happen to-morrow or next week, but the underlying valuations are so compelling now, especially after the last couple of weeks that I can't see it being down too long," he says.

"Investors are pulling in their horns but we don't think there is anything fundamentally wrong with Russia. If anything the news seems to be getting better in terms of politics and the economy," adds Key.

"The fundamentals remain quite good both from a mac-ro-economic and political point of view which is always an important factor in the Russian market," says Smart.

Key describes Russia as a strategic value play. "There are a huge number of assets that are being re-rated as they become somewhat better managed."

He identifies the main drivers as valuation and the resumption of economic growth adding that Russian assets are currently valued on a par with Turkey, but that it is a much much bigger economy and its prospects are improving. "This year is the first year that recorded GDP is going to show some recovery," he adds.

In terms of sectors, analysts are largely in agreement.

"The favoured sectors are those that are going to benefit from a pickup in economic growth," says Steven Watson, Eastern European fund manager at Framlington in London.

Importantly the oil and gas and telecommunications sectors have or will soon become cash flow positive benefitting suppliers for engineering and electrical equipment and for telecommunications infrastructure. He also likes the metallurgical companies.

"The retail sector is finally likely to come alive. We have seen several years of de-pressed GDP growth and I think that we are finally starting to see a turnaround so the retailers and their suppliers could also do well."

Smart adds: "The oil sector is always first on everyone's list and with the decline in prices, valuations are very attractive. Beyond the other favourite sectors of telecoms and utilities there are some interesting stocks in the transportation, metalurgy and construction sectors."

Mayo concurs with this assessment. "We are looking at the leading sectors of the economy. We are not trying to be too cute. It is not the time to be cute at the mo-ment. It is a time to go back to the quality plays, telecoms, power generation etc."

In terms of the risks, Watson says that this largely de-pends on interest rates. Russia has a large amount of domestic debt because of the inefficient tax collection system.

Government reformers are determined to pursue a viable taxation reform but they do face opposition from conservative factions in parliament.

Smart adds that the risks in Russia are similar to the risks in any emerging market, in that the market is relatively small and trading is relatively thin.

But he is also specifically concerned about taxation. "Can the government close the budget deficit through non-inflationary finance? That is the big question next year."

Many of these problems are reflected on the interest rate front. The central bank in an effort to raise state finance recently raised rates from 21% to 28%. "This is part of an effort to draw in financing for the budget," says Smart. "I would expect that barring any other overseas shock those rates will climb for several months."

Mayo believes that Russia will compare favourably with Asia where he believes that bad debt in countries such as Thailand will continue to come out of the wookwork for up to five years.

One "negative out of a positive" according to Mayo is that with its absense of banking loans for property, Russia is protected from the risks associated with property gearing.

"The internal risk is that things take longer than we expect to happen but this is very low. The default risk is very low now because of the growth upturn.

"The real risk is global: that Russia becomes the best of a bad lot, if everyone decides to get out of emerging markets in general." John Lappin"

Topics