Russian capitalism turns off equity investors

In the shadow

Stock markets worldwide have suffered declining turnover, as the fragile global economy fuels aversion to risk, but the slump in activity in Russia has been especially steep. Over the same 12 months to October, market turnover fell 34 percent in China and 22 percent in Turkey, Renaissance Capital calculates.

Russia has also seen a widening of its traditionally large valuation gap compared with emerging market peers, and now trades at a 40 percent discount on a price-earnings basis. Much of that is due to global investors shying away from risk assets.

Russia is absolutely in the shadow of global trends, said Chris Weafer, chief strategist at Sberbank CIB. There needs to be a reduction in global risk phobia - no matter how cheap they are, investors won't look at fringe markets.

Although the MICEX index and its dollar-denominated peer the RTS have eked out modest gains for the year, they are still down a quarter and a third respectively from the highs they set in April 2011.

For those few Russia equity bulls, like Citi strategist Kingsmill Bond, the country now offers deep value and the market could rally if Putin's counter-reformation makes headway in implementing a series of steps to make it easier to do business.

Investors have been scared off by the negatives but need to recognise the positives, Bond wrote in a research note, predicting that Russia's valuation discount would halve to 20 percent by the end of

... contd.