beyondbrics

Russian stocks look cheap. So says Jonathan Garner, of Morgan Stanley, in his latest strategy update. The bank is increasing its overweight rating on the country, which it now ranks as its favourite Bric, and equal favourite emerging market (in terms of active country weighting), alongside South Korea.

MS is increasing its overweight active risk position on Russia from 100bps to 220 bps, and reducing its weightings on Brazil and China – which falls from the #1 spot to #5.

Here’s Garner’s logic on Russia:

Economically, Russia is in somewhat of a sweet spot. GDP growth was slower to recover than in other BRIC countries. However, we forecast a sequential acceleration in yoy growth through Q4 of this year at a time when growth is likely to decelerate somewhat in Brazil, India and China…

Russia’s trailing P/E relative to China is currently 0.58x, which compares with a long-run average of 0.72x. Russia’s relative ROE versus China collapsed to a multi-year low of below 0.5x in 2H 2009. However, consensus projects that it will rise to 0.9x at end 2010. On this basis the Russian market ex-ante looks a little too cheap relative to China.

In US$ terms MS also forecasts earnings growth in Russia to top 50 per cent, while China will struggle to reach 25 per cent.

Apt timing. This morning the Russian government ditched a tax on foreign profits in a bid to attract foreign investment. According to AFP’s report, Russia’s president Dmitry Medvedev told foreign business leaders in St Petersburg:

“Investment activity is one of the factors for investment development and successful modernization of our economy,” Medvedev said. “Russia needs a real investment boom.”

The RTS index was up 0.4 per cent following the news, with the oil and gas sector – which could well be the target of any influx of foreign capital, outperforming.

As beyondbrics reported earlier in the week, the BP oil spill could well be Russia’s chance to attract the investment boom it needs. The government is today sending a clear message that it’s ready to reduce its own involvement in the economy and encourage the private sector – both within and outside Russia – to take up the slack. Or, as the president put it:

“People often think that the person who picks apples does the main job, but in fact it is the one who plants the apple tree whose job is crucial,” he said.

“The state should not always pick the apples on its own. In a free economy there will always be people who will do it better and faster.”