Russia: Undervalued BRIC or Major Risk?

Following huge losses for the Russian market in 2008, investors have eyed stocks in Moscow skeptically and refused to give them the same rating as those in other BRIC members, Brazil, India and China according to Roland Nash, the chief investment strategist at Verno Capital.

Frans Lemmens | The Image Bank | Getty Images

“In Brazil, India and China, the population is young and growing. In Russia it is older and shrinking. Equity investors were particularly skeptical. Whereas the equity markets of other BRICS countries had rapidly recovered, Russia seemed unable to get over the shock of the 75 percent fall in late 2008,” said Nash in an interview with on Tuesday.

The question is whether stocks in Russia can play catch-up, given investor skepticism on the fundamentals and corporate governance.

“Russia is increasingly shaped by, and shapes, the same trends which define the other BRICS. The opportunity for equity investors is that, while the trends are reflected in the valuations of Brazil, India, China and South Africa, they are under-­estimated by investors into Russia,” said Nash.

Russian growth, in dollar terms at least, actually exceeded that of China between 2000 and 2010 but Nash believes as the BRIC countries have grown, so have their differences.

“Until 2008, the US consumer was the engine of global demand. Accounting for roughly 25 percent of global GDP and with a current account deficit which matched the surpluses generated in Asia, the US dominated global demand trends,” said Nash.

“But since the crisis, the US and Europe have struggled to recover economic momentum and the current account deficit in the US has halved, yet the global economy continues to motor forward, led by the growth in the BRICS,” he added.

With huge energy and natural resources at its disposal and new projects coming on line, Russia has been a major beneficiary of Chinese growth.

“While there are a whole host of well-­known Russia-­specific risks, the global trends will likely dominate the domestic in the future as much as they have done in the past,” said Nash.

One of the big problems for the Russian economy has been a failure to invest money made in commodities back into the economy.

“The fact that Russian growth slowed in the first quarter despite the surge in oil prices suggests that all is not well in emerging Europe’s largest economy,” said Capital Economics' Neil Shearing.

“Growth should accelerate over the second half of the year, but the signs that investment has collapsed casts a shadow over the economy’s medium-term prospects,” the senior emerging markets economist added.

“While Russia clearly benefits from higher oil prices, there is no mechanistic pass-through to higher rates of real GDP growth,” Shearing added.