Some emerging markets investors are looking past Russia's upcoming parliamentary vote - in which leftists should post a strong showing - to gauge whether the country's beat-up stock market presents a buying opportunity.
And at least some investors think it does. Despite the myriad political and economic problems besetting Russia right now, including concerns about a stronger leftist voice in Parliament, some investors see signs of economic brightening coming after Russia's long economic winter. To the optimistic camp, risks of investing in Russia are shrinking for the long-term investor.
Investing in "Russia is about the riskiest thing you can do as an investor. But it also represents the highest potential return of anywhere in the world because it's remarkably cheap," holds Arjun Divecha, managing director in the Berkeley, Calif., office of Grantham, Mayo, Van Otterloo & Co.
In August, his firm began taking modest positions in Russia. Currently, these account for less than 1% of a global emerging markets portfolio managed by the firm.
David Tripple, chief investment officer of The Pioneer Group, Boston, said "prospective returns are very high - 50% a year for the next five years. That might not be what everybody makes because it's a difficult environment for doing business. But the projects we are putting our money into (should generate) those kinds of returns. And the parliamentary election doesn't change our expectations."
Pioneer already owns a majority stake in one of the largest Russian voucher funds - First Investment Voucher Fund. (Voucher funds pool the vouchers that were issued to Russian citizens to purchase shares in privatized companies, and then they exchange the vouchers for shares of companies in which they wish to invest.) Pioneer also is in the process of establishing two institutional funds, one for listed equities and another for private equities. In addition, Pioneer has been selected by Russia's Securities Commission to create one of the first domestic mutual funds in Russia.
Patrick Gifford, a director of Robert Fleming Holdings in London, said the closed-end Fleming Russia Securities Fund Ltd. still has about a third of its assets in cash, but is "gradually putting money into the (Russian) market." He said the "climate is reasonable, stocks are cheap, a lot of potential problems have been discounted, and (corporate) profits look to be improving."
Mr. Gifford said the Fleming Group had hosted a dinner in Russia in last September in which Gennady Zyuganov, head of the Communist Party, spoke. "The impression he gave us was that he did not represent a return to Marxist-Leninism. He accepted that Russia's was a mixed economy," said Mr. Gifford. But, he acknowledged, "it's difficult to know if one should take that at face value."
At London-based Foreign & Colonial Emerging Markets, economist Sarah Ross aid:
"There are causes for political uncertainty in the short-term," and concern about the health of President Boris Yeltsin. However, Ms. Ross believes "the economic picture looks much more positive than it did just a year ago." In 1996, economic growth should return to somewhere between zero and 3%; in the meantime, inflation (4.5% for the month of September) appears to have been stabilized.
Foreign & Colonial has a 0.2% weighting to Russia in its $355 million global Emerging Markets Investment Trust and a 5% exposure in Osteuropa, its $14.6 million Eastern European fund.
Dana McGinnis, president of San Antonio Capital Management, San Antonio Texas, believes if investors "don't get in now, they might as well never. The market is not going to get any worse; it's not going to go to zero. The best buys are available now."
The market has dropped precipitously this year since its rally that peaked on July 7. Between then and Dec. 1, the market fell about 38%.
Curiously, during the third quarter, Emerging Markets Funds Research Inc., Glen Allen, Va., found $120 million of assets of 108 emerging markets funds surveyed went into Russia, compared with $55 million in the first quarter and $25 million in the second quarter.
Quite a few investors agree the outcome of Russia's Dec. 17 parliamentary vote shouldn't matter too much to investors; many already have discounted expectations of a strong showing by the leftists. But the Duma wields little power in Russia compared with the president. And the election for that office is still six months away.
For other reasons, Credit Suisse Investment Management, London, turned away from Russia's market at midyear. According to managing director Glenn Wellman, the midyear move came partly after the Russian market's rally in the first half of the year. But "more particularly," the move came "because we figured Russia and Eastern Europe were becoming less attractive compared with central Europe, where the economic growth and political structures looked more stable," he said. In an emerging European portfolio, Credit Suisse now has no exposure to Russia, compared with 10% earlier in the year.
Martin Currie Investment Management, Edinburgh, Scotland, has very little exposure to Russia.
"My view is that it is too difficult a market to call at this stage of its development. To our mind, it's a pre-emerging market" in which there are questions about the the structure of the stock market and how well regulated it is; and "we are not convinced that corporate management in Russia has the interests of international shareholders at heart, said James Fairweather, a director of Martin Currie. What's more, "the political environment is very unfathomable at best. We are trying to play Russia's economic development through stock investments in Poland," he said.