We are often asked our views on funds, asset classes or regions we don’t invest in, have we considered them and why have they not made the cut? Often it is on the back of strong performance and/or heavy media coverage.
We have an ongoing approach to investment management and continue to review opportunities that may or may not be accepted into our mainstream models. It is impossible to research and analyse every single investment but with the use of powerful analytical systems we can try to turn over the stones to unearth the investment gems.
We look to work out what factors are currently impacting the investment and is there anything that could change the dynamic of the factors on the investment. Taking a pragmatic approach to analysis we can break down investments highlighting opportunities and threats which lead to a final recommendation for inclusion in our investment models.
We have recently reviewed Russian and Indian equities as potential investment opportunities. Both asset classes have experienced very different returns over the past 2 years with India at one point being up over 50% and Russia being down over 50%, this is not the end of the stark differences we found.
Both countries are on opposite sides of the oil trade. Russian GDP is highly exposed to oil production and sales and MICEX, the Russian equivalent to our FTSE, made up of 50 companies has over 50% in oil and energy sectors. With a further 13% in metals and mining it is apparent that Russia is a massive commodity play. In contrast, India is actually benefitting from the low oil price as subsidies paid out against high oil price are now net positive for the countries balance sheet, and the equity index is just 11% and 6% in energy and materials.
GDP projections are moving in opposite directions, as recently as 2013 India at 10 was two places below Russia in the GDP global rankings but is projected to rise to fourth largest in the next 10 years. India benefits a greater exposure to consumer goods, IT and healthcare, arguably sectors that we would expect to be future growth drivers. Coupled with more favourable demographics are factors in the differing expected growth patterns.
Both countries share chequered histories with regards governmental corruption. Current incumbents of power though offer on one hand a good level of optimism and on the other hand a strange feeling of unease.
The Indian appointment of Narenda Modi was hailed and business optimism ensued, further Modi has made positive appointments in key positions none least than Raghuram Rajan the Governor of Bank of India. Rajan a proven economist is considered very market friendly and is looking to reform the banking sector in India. Vladimir Putin on the other hand is currently attempting to deflect attention away from his exploits in Ukraine by treading on toes as he wades into the Syrian civil war. Russia is already suffering harsh sanctions for the role it is playing in Ukraine. We are not alone when we look on in trepidation at Mr Putin’s next move.
Russian equities at the time of research were trading on a forward PE of 4.4 that means for every £ of earnings over the next year you would pay £4.4, whilst Indian equities traded on a forward PE of 16.8. The Indian equities are trading on a far greater multiple than the Russian equities but this can be justified by the difference in expected earnings growth of the companies. India with strong prevailing economic conditions and low exposure to distressed commodity sectors is expecting good earnings growth whilst Russian equities are expected to see earnings contract although strengthening oil price could see this change.
Both India and Russia could offer good investment returns for very different reasons.
Russia is dirt cheap and you could argue never a better time to buy but similar arguments could be made for commodities over the past 5 years and we are still waiting to see a change in fortune for that sector. In essence you are making a play on expected oil price but you are also opening yourself up to the risks of dealing in Russia. There are many different ways to play oil prices that may not have the potential of returns on offer but come at a far lower cost in terms of risk.
India is expensive but in terms of potential earnings growth it is more compelling. The gains made over the past 2 years has pushed valuations a little too far but recent market corrections have made it more attractive. We have exposure to India through one of our existing funds and we will keep an eye on the market for further opportunities.
At the end of the day though we are interested in buying equity. That is to buy a share of the future earnings of a company. We are interested in how expensive the shares are in terms of future earnings whilst taking into consideration the risk to those earnings. If we are optimistic on a region or country we may be prepared to pay more for shares in terms of earnings if we believe they will improve and similarly it is possible to make good returns on shares of low earnings so long as you pay an appropriately low price.
The information provided through the Equilibrium website based on our opinion and is for general information purposes only. It is not, and should not be construed as financial advice.