Despite being the closest member of the BRICs, the Russian economy is still largely unknown to Spanish investors. However, we are already beginning to see its inhabitants travelling en masse around the world. And little by little we are becoming familiar with their appearance and language, because more and more Russian tourism is flooding the Mediterranean coasts from the Turkish Riviera to the Costa Brava. Restaurant menus in the Cyrillic alphabet are now quite common, and this is a clear sign that their roubles are beginning to make a substantial contribution to the balance sheets of our companies.
By contrast, few western investors' euros or dollars are circulating on the balance sheets of Russian companies. And that is an exceptionality that investors would do well to take advantage of, before Mr Market has the occasional bout of efficiency and lucidity.
Some will say that political instability, oligopolies and the Russian mafia are reason enough to scare off any good investor. For better or for worse, we are in the midst of a syncopated New Normal, especially in the so-called developed world. Are not the post real estate bubble American banking collapses, the financial failure of the European periphery, the return of Berlusconi, Draghi's decisions, the existential doubt about the fiat money, The US fiscal cliff, the Greek default or the Spanish bank bailouts with an enormous credit crunch? Compared to some of these episodes, the reality of Putin's Russia over the last decade is little short of peaceful.
Let us look at some figures from Russia that, in our view, more than compensate for the uncertainty of investing in an economy with an authoritarian regime like Vladimir Putin's:
- GDP has increased over the last 12 months by 3.5%.
- The stock appreciated by 11% in 2012, trading at only a 5.9x earnings multiple. However, the Brazilian, Chinese and Indian stock markets trade at P/Es of 21x, 12x and 16x respectively. For reference, the S&P has traded at a P/E of 15x in 2012.
- The budget surplus (incredible as it may seem to us, not all countries have public deficits these days) this year has been 1.4% of GDP, beating the government's forecast of 0.1%.
- The rouble has appreciated by 4.5% against the dollar during 2012, and by 3.7% against the government's basket of benchmark currencies.
- Inflation is under control at below 61 Q3Y2013, reaching year-on-year figures throughout 2012 of 41 Q3Y2013.
To all these enviable figures, we should add that the country's public debt does not exceed 11% of GDP (yes, you read that right, 11% of GDP!), and it is also a state with oil coming out of its ears. And as if that were not enough, this oil is very easy to extract, which means that the profit margin it leaves is much higher than that of other oils that are much more expensive to extract (high seas, high depths and densities, etc.). In other words, a higher profit margin per barrel, the price of which is increasingly adapting to the growing extraction costs of most OPEC countries.
But there is more. A significant part of Russia's oil production is strategically committed to its historically close neighbour: China. The Chinese need to secure their supply of huge quantities of oil and gas for the coming decades. Their project (reality) of being the world's leading power cannot depend on any Western - US-friendly - or Muslim boycott. And in addition to a major direct Russia/China pipeline, two other pipelines are already under construction, which ensure and will ensure energy and financial transfusions between the two giants over the coming decades.
We are therefore faced with a country with enviable macroeconomic figures, gigantic natural wealth, whose commercialisation is assured, and in the public and para-public hands of a powerful and authoritarian government. A growing middle and upper-middle class, domestic consumption as buoyant as China's, and the value of its business giants, with dizzying safety margins with respect to the prices at which they are trading.
Let us look at the earnings multiples at which the shares of some energy companies are trading, which have a decade ahead of them that could well be prodigious:
- Gazprom: P/E 2012 3.0x - P/E 2013 2.9x
- Bashneft: P/E 2012 4.3x - P/E 2013 3.3x
- Surgutneft: P/E 2012 4.2x - P/E 2013 5.3x
Even some stocks in other sectors such as agriculture and consumer goods are also at rock-bottom prices:
- Miriya: P/E 2012 4.1x - P/E 2013 3.6x
- MHP: P/E 2012 4.8x - P/E 2013 4.2x
- Cherkizovo: P/E 2012 3.9x - P/E 2013 3.5x
The million-dollar question is why are such stable and solid businesses trading at outrageous multiples? It should escape no one's notice that the Western media's animosity towards Putin and his anti-American alliance environment is holding back most institutional investors in the developed world. This leads to the absence of huge investment flows into Russia by sovereign wealth funds, pension funds and large institutional investment funds. If there were not such a mixture of Western animosity and fear of Putin (whether mediated or justified, time will tell), we would certainly not see Russian companies trading at such extremely low prices.
Logically, it would be very risky to invest in companies that we do not know comprehensively, just because they are trading at low PERs. This is not a magic formula that systematically has happy endings (although it usually ends up much better in the long run than most technical analysts and sellers of miracle stock market courses). Therefore, we must always go much further than simply betting on P/E or earnings per share.
The key, as always, and even more so in emerging countries, is to invest with the best managers specialising in these economies, in these sectors and in these companies, even exercising corporate governance in some of these businesses. Some of the companies we have mentioned are included in portfolios of funds that are in the hands of managers who are capable of doing this, and who have obtained returns in excess of 35% annualised. But not in the last 3 or 5 years, but over the entire life of the funds, more than a decade ago. That's nothing. Before you ask, I have to tell you that unfortunately the manager of these funds we are referring to, which invest in Russian companies, has not registered them for marketing in Spain. And therefore, they are hardly accessible to the ordinary investor without proper advice.
In short, we are facing an emerging economy that lists companies with very solid businesses at very low prices. And despite Russia's political uncertainty and Putin's whims, it is very interesting to access, from the best managers, businesses that are more than stable, that every year they earn a quarter or even a third of what we are paying for them today.. Such opportunities do not come along every decade, and even less so in a global environment of little or no growth and solvency.