Russia and commodities: is a super-cycle coming?

Initially, sparked by the arrival of successful Covid-19 vaccines, the momentum in these areas has continued as the global economy slowly recovers.

So what is a good way of playing this recovery?

Well, Priyesh Parmar, a research analyst at broker Numis, has a really interesting idea – the JPMorgan Russian investment trust, which back in June was trading at a discount of 13% and yielding 4.8%.

The discount has moved around quite a bit since late 2020 but all through this period has remained wide enough to be attractive if you agree with some of Mr Parmar’s basic premises about Russia.

Firstly, it is the world’s largest energy exporter and as such is ‘geared’ towards the reopening of the global economy and also what is known as the ‘reflation trade’ as prices in key areas begin to rise.

Secondly, he points out that Russia is the cheapest major global equity market with an historic price earnings ratio of 9.5 times but also offering a yield of 5%.

As well as the discount and yield on JPM Russian, he points to the experience of the company’s fund manager, Oleg Biryulyov, who has managed the portfolio for close to 20 years since 2002.

Unsurprisingly, corporate governance is an important part of the way Mr Biryulyov invests in his bottom-up, company by company, research intensive style.

This has lead him to avoid some companies which have performed very strongly in share price terms but where he feels there are questionable corporate government issues. Mr Parmar cites this as an important ‘safety’ check for investors. One company the trust has avoided is TCS Group, the bank with no branches, another is diamond mining stock Alrosa.

The trust really plays into the ‘cyclical recovery’ theme because around 80% of its portfolio is in energy, materials and financials, which also reflects the wider Russian equity market.

Well-known names in the trust include Gazprom in the gas sector and Sberbank, which dominates Russian banking but is also expanding into non-financial technology, but it also has 10% of its investments in small and medium sized companies in some of the former Russian states, which offers investors in effect a bit of ‘kicker’ from their growth.

One area that Russia is not well-known for is dividends. But Mr Parmar points out there are some in the trust’s portfolio producing good payouts for investors; these include Sberbank, steel business Severstal which pays a near 11% yield and Norlisk Nickel, which mines and smelts palladium as well as nickel, currently has annual yield of over 7.5%.

Other reasons to look at the trust? Well, it has no gearing or debt facility which may be surprising but the manager believes the cost of debt is unattractive and it would potential add volatility to what is already a volatile asset class.

The other main reason is that the trust has a discount control mechanism in place and a potential trigger for a tender offer that might arise in October this year. Both of these, Mr Parmar believes, underwrite some of the risk for investors who may not be too sure about the shares.

One way to get to exposure to the Russian market would be through an ETF, but the largest such fund, VanEck Vectors Russia ETF, is US-listed a uses a purpose built index, MVIS Russia, which has lagged the wider market as well as having liquidity and individual stock limits at 8%.

The JPM trust doesn’t have this issue and has some strong conviction holdings, for example it now has 15% of its assets in Gazprom, up from 8% last October, to reflect this cyclical recovery.

Of course, Mr Parmar acknowledges for some investors there are ethical or ESG concerns about investing in Russia. He points out, quite fairly, that many investors are exposed directly to another controversial country China through investments trust particularly the large global equity or technology trusts but seem comfortable with that situation.

What Investment View: Russia might be seen as a contrarian or even controversial investment choice for some, but the cheapest of the market, the trust’s discount and the long experience of the manager means an allocation to shares in JP Morgan Russian about now could be worth considering.

Related reading:

JPMorgan Russian Securities fund review

Should you be investing in the Russian stock market?

Sure Read Source

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