Vitalij Sostak, Portfolio Manager, JSC Parex Asset Management, Latvia

The Russian and CIS region is an area of endless opportunities. The same comparison may be also used in the area of investment. If you invest in Russia and the CIS region, there is a great potential for future performance. However, the taken risk is also high, which can be seen in the events over the last months. In Russia, investments are influenced significantly by the political risk, apart from the „standard“ investment risks. The current fall of the market needs to be seen as a convenient shopping opportunity. Economic, political and demographic development in Russia is monitored by everybody – at least partly. Russia still belongs and shall belong to the powers which directly influence global economy and capital markets. The dominant areas are mineral resources headed by crude oil and natural gas. Russia, as vast natural resources “store”, creates a significant competitive advantage over other regions. This is mainly due to its ability to export its resources since the mining industry can cover more than the country’s own domestic consumption. Investment into Russia has a promising future thanks to this expected development.

Economic outlook

The Russian & CIS economies have shown that they are able to stand on a solid and stable foundation over the last few years.


After spectacular contraction in 1H09, the Russian economy is rapidly recovering. Strong YTD growth of GDP and industrial production confirms the estimations that Russian economy will be one of the fastest growing in emerging markets space in 2010. Especially encouraging is gradual recovery in domestic consumption and fixed investments – likely the main growth engine in 2010. In context of recent fiscal turbulence in Europe, Russia probably could be considered as a safe haven from a macroeconomic point of view. With an insignificant debt to GDP ratio of 6.8%, the third largest globally international reserves (USD 460 bn), a current account surplus of USD 34 bn in 1Q10 and a projected 2010 fiscal deficit of 6.8% (budget is based on an oil price of USD58/barrel, so given the current oil price there is high probability that deficit will be significantly lower), Russian macroeconomic stability is not under question as the Central Bank of Russia (CBR) continues to stimulate the real economy. The CBR has cut it’s refinancing rate by 13 times from April 2009 – from 13% to 8.00%. Liquidity in the banking system is at a very high level, implying no risk of negative systemic events. Moreover, after more than a year of credit portfolio contraction and liquidity accumulation Russian banks are re-starting lending activity again and this process will most likely accelerate rapidly in 2H10.


Ukraine, being an export-oriented economy, has also benefited from the ongoing global economic recovery. Driven by core export industries (particularly, metallurgy), real GDP increased by 4.8% y-o-y in 1Q10. Taking into account the advantage of favorable external conditions and a higher comparison base over the next quarters, real GDP is estimated to grow by about 3.5-4% y-o-y in 2010. The stronger demand from recovering global markets as well as positive commodity price environment are expected to favour further growth of Ukraine’s export-oriented industries. In addition, a 30% discount on prices for natural gas imported to Ukraine, which was agreed with Russia in April, is expected to support particularly the natural gas-intensive chemical industry and metallurgy, thus giving stronger impetus to the recovery of the Ukrainian economy. Being buoyed by foreign investors’ resuming risk appetite and the improving internal conditions in Ukraine, the country seems to be recapturing access to global capital markets.

Central Asia

Also other CIS economies such as Kazakhstan are recovering faster than initially expected, with real GDP growth in 1Q10 estimated at 6-7% y-o-y. It is likely that upgrades in this year’s GDP growth forecast, which currently stands at 1-2% will be seen. The growth is mostly driven by recovery in resources sectors; however, there are signs that it is gradually spilling over to other sectors of economy.

Central Asian resource stocks have greatly benefited from the benevolent commodity price environment over the past months and the strong economic growth in China. Many Central Asian companies have good output growth potential throughout 2010. China’s proximity is benefiting the region not only, being the world’s fastest growing (and for some resources largest) resources market, but also through increasing Chinese foreign direct investment in the Central Asian resources sector; a trend, which is expected to continue.

Real Economic Growth Rates, % yoy

Capital market

The Russian stock market is still young. Share dealing started in 1995. After the 1998 crisis, the Russian stock market quickly recovered and brought above-average performance for investors. The RTS Index has grown from its base in 1998 up to the present by an incredible 3,900% despite the current market decline. Since its establishment in 1995, the index value has grown by 1,500%. There are more than 200 share titles traded on the Russian market, the main RTS Index contains 50 of the biggest companies. The Russian stock market is outbalanced in the power-engineering and oil sectors. In the RTS Index, the proportion of oil and power-engineering companies is more than 50%. The biggest proportion in the Index (15%) is owned by Gazprom and Lukoil.

Foreign investors continue to perceive Russian risk positively, driving sovereign and corporate bonds spreads to pre-crisis level. Such risk re-pricing is generally positive for equity market, which is still down about 45%, as that could trigger further decrease the cost of equity in valuation models. Moreover it should be noted that Russia is still underweighted in the Emerging Markets Funds compared both to its historical weights and MSCI index structure.

Russian and CIS equities are becoming real bargains

For value investors Russian equities probably will be the real bargain. Based on the conventional relative valuation metrics Russian equity market is one of the cheapest in the world. Meanwhile, the recent price correction has made valuation levels even more appealing. Considering recent dramatic price swings in the region’s equity markets, the equities perspectives are increasingly optimistic. The region’s unique geographical location and natural resources base combined with undisputable macroeconomic and political stability undoubtedly will appeal to investors, looking for lower macroeconomic risks and effective diversification. Also high exposure to commodity prices will be beneficial for region’s equity markets in 2010 as a supportive liquidity environment, implied by an extremely mild global monetary regime, and strong growth of developing economies will likely significantly increase demand for commodities. Meanwhile rapidly rising domestic consumption is providing important source of macroeconomic diversification and likely will be able to soften any potential external macroeconomic shock. Finally, screamingly cheap equities valuations make Russia & CIS region’s equity markets just the “must to invest” option for every value seeking investor.

Estimated 1y P/E

WIOF Russia and CIS Performance Fund = the Fund of „Endless“ Opportunities

Due to extensive knowledge of local conditions, the fund is managed by JSC Parex Asset Management (Parex AM), which belongs to Parex Bank, the oldest banking group in Latvia. It is at the same time the biggest and fastest developing asset manager in the Baltic region. The Head of Portfolio Management is, Edgars Makarovs who has 11 years of investment experience in the region. The company predominantly manages portfolios investing in Eastern European markets and comprises a high proportion of stock portfolios. Parex AM specializes in this segment and believes that the current economic and investment environment is especially favourable for managers that base their investment strategy by not following the broad market and replicating the benchmark but on the active exploitation of market inefficiencies. WIOF Russia and Performance Fund belongs in this category. Parex AM has a track record that has proven its ability to deliver superior risk adjusted return, especially in times when the market exhibits higher uncertainty and volatility.

Exposure to the Russian and CIS stock markets belongs to each globally diversified investment portfolio. Should the investment risk be sufficiently spread, the WIOF Russia and Performance Fund should not be missing from a client’s investment portfolio. The fund itself is one of the more risky funds but in a complete portfolio it has a role that cannot be substituted. Using the WIOF Russia and Performance Fund, you can significantly increase your portfolio performance.

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