2012 could see positive rerating for BRIC markets due to monetary easing, earnings per share growth, and currency appreciation.
HSBC Global Asset Management has re-iterated its positive stance on Russian equities in the run up to the Presidential elections in early March.
HSBC Global Asset Management - a leader in emerging market funds* - considers that following a substantial correction in the second half of 2011 followed by some recovery, Russian equities are attractively priced compared to other emerging markets, as well as to their own historic average. Consequently, Russian equities represent the largest overweight position in the HSBC GIF BRIC Equity Fund** and in other broader HSBC emerging market portfolios.
Nick Timberlake, Head of Emerging Market Equities at HSBC Global Asset Management, said the Russian equity market is trading on a forward price earnings ratio (PE) of 5.6 times, nearly a 35% discount to its 10-year average of 8.2 times.
When measured relative to its broad peer group, the MSCI Global Emerging Market Index (currently trading on 10.4 times), Russia's discount is nearly 50% (compared to an average of 25%) to the MSCI GEM index over the past 10 years.
Russian equities had suffered amid the global risk aversion led by the sovereign debt crisis in Europe, US Fiscal issues and concerns over Chinese growth.
More recently internal factors such as risks relating to the political situation in Russia have weighed on sentiment. But HSBC Global Asset Management believes these appear to be easing, with recent protests likely to accelerate electoral, political and economic reform initiatives.
Ed Conroy, co-manager of the HSBC GIF Russia Equity fund, said it is likely that global investor sentiment will return as a key driver of the market. Therefore, any further deterioration in the global economic situation would likely cause weakness in the Russian market.
"However, given the current attractive valuations of the market, any resolution of the external factors beyond what is expected would likely be the source of significant upside for the Russian market," he said.
"Should the constructive tone on the domestic political front continue to develop, and personnel and policy changes be implemented, we would expect this be a positive catalyst for a re-rating of Russian equities."
Conroy said should global growth concerns intensify and Russian politics deteriorate there would be downside to these forecasts, although he argues that too much gloom is already priced into the market.
Two key themes within the Russian portfolio include energy and financials.
As the world's largest producer and exporter of oil, the commodity's importance to Russia cannot be underestimated. Conroy said oil-related companies are benefiting from the high price of Brent, trading at around $122 per barrel. Current consensus earnings forecasts for Russian companies is based at around $95 barrel, so there is room for upside if prices stay stable, and a cushion should the oil price retreat.
"We see deep value in the sector versus oil companies in other markets; the Russian oil industry trades at approximately a 40-50% discount to global and emerging market peers. A further benefit is the oil sector taxation reform which should make it more attractive for oil companies to commit to capital expenditure" Conroy said.
A further theme is the financial sector, which is a direct play on Russia's recovering economy. With high net interest margins, high capital adequacy, loan growth expected to be 20% for the sector in 2012 and low valuations, relative to emerging market peers, good investment opportunities in the financial sector can also be found, Conroy added.
Speaking more broadly about emerging markets, Timberlake said although 2012 could be another volatile year, HSBC Global Asset Management expects emerging markets to rise this year, subject to some key external risks being avoided (such as a hard landing in China, US policy risks or a global recession triggered by the EU sovereign issues).
Positive stock market returns across emerging markets will be driven by a combination of valuation re-ratings which are helped by monetary easing, earnings per share growth, and currency appreciation.
BRIC markets in particular are cheap relative to the broader emerging markets after de-rating considerably since the 2007 peak.
Following Russia, Timberlake said his next most favoured BRIC market is China, as HSBC Global Asset Management is confident policy makers will continue to be successful in engineering a soft landing, and due to low valuations compared to historic averages.
Meanwhile, HSBC Global Asset Management is closing a previously underweight position in India due to the growing numbers of attractively ranked stocks, and the overall valuation discount relative to its own history, reaching historically high levels.
Brazil, although still attractive over the long term, is presently considered to be the least favoured BRIC market, primarily due to its current higher valuations.
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