Is now the time to buy sanction-hit Russian shares?

Russian share prices plunged this week, after the United States announced significant new sanctions. Investing in Russia has long been a case of feast or famine. For a sterling investor, the FTSE Russia index has fallen by 22pc over the past 10 years, and fell by around 70pc between 2008 and 2009 during the global financial crisis.

There have been large gains too. The index returned 180pc between February 2009 and April 2011, and 120pc in the year to January 2017.

Based on a price-to-earnings (p/e) ratio, which compares companies’ share prices with their earnings over the past 12 months, Russia is the cheapest stock market in the world.

It scores 7.7, compared with 17.1 for the UK and 21.8 for America, according to data from investment firm Star Capital.

Its “Cape” score, which compares share prices to average annual earnings over the past 10 years, is 6.3, compared with 15.3 for Britain and 29.8 for America. The average emerging European nation scored 9.3, while emerging markets as a whole scored 17.2.

But shares being cheaply valued does not necessarily make them worth buying.

Rob Burdett, who runs “fund of funds” portfolios for BMO Global Asset Management, said: “Russia is perennially cheap. If we were talking two weeks ago, before the fall, we would have said the same.

“The country faces heightened political tensions, and is maligned by a lot of investors due to its reliance on the oil price.”

He explained that although it is the political situation that is driving share prices at present, in the mid to long term the oil price remains a “significant factor for the economy, government bonds and more”.

He added: “It is unlikely we will ever have a large investment in Russia in our portfolios.” The newly announced sanctions include punitive measures against a selection of businesspeople, companies and government officials.

Ravi Cheema, of fund manager River & Mercantile, acknowledged that a pickup in economic growth, falling inflation, rising employment and “reasonably priced” shares could make Russia attractive.

However, he said: “Geopolitics is important for any emerging market, and we think this geopolitical flashpoint is serious. In the short term,

Professional investors are split over the prospects for Russia. Mike Coop, who runs multi-asset portfolios at Morningstar Investment Management, takes a different view.

He believes the recent sell-off has been a “knee-jerk reaction” and that Russia offers potential as part of a diversified portfolio for investors who are “willing to tolerate a very high level of risk”.

He said: “The recent sell-off has been widespread, and not just limited to industries affected by the new sanctions, which don’t explain a fall in value of this magnitude. The Russian economy has already faced years of sanctions.

“Investors have a margin of safety in the cheap pricing, and the oil price is sustainably higher. Russia offers an attractive risk-reward balance when shares elsewhere are expensive. The sanctions aren’t a game-changer.”

He has “low single digit” percentage investments in Russia in some of the portfolios he runs.

The cheapest stock market in the world just got cheaper. James Connington asks whether that increases its appeal

Mr Coop believes experienced investors who want exposure should do so via funds that invest specifically in Russia, or via a multiasset fund that manages the Russia exposure for them.

There are only a handful of Russiaspecific funds available to investors. Of these, only one has managed to beat the MSCI Russia index over a variety of time periods: Neptune Russia & Greater Russia, which has beaten the index over one, three, five and 10 years and since launch in 2004. It charges 1.09pc annually. However, it has not escaped the pattern suffered by the index. Over 10 years, investors would have lost money.

The fund is highly concentrated, with 64pc in the top 10 holdings.

Another option is to buy a global emerging markets fund that has some exposure to Russia. You will need to consider everything else about the fund too, however, and make sure it doesn’t overlap with other funds in your portfolio.

Mr Burdett suggested Hermes Global Emerging Markets, run by the “very experienced” Gary Greenberg. It is around 4pc invested in Russia, and Russian state-owned bank Sberbank is a top-10 holding. The fund has a charge of 1.13pc a year.

There are exchange-traded funds that track indices of Russian stocks available too. These are cheaper, but mean you are getting exposure to the whole of the Russian market – good and bad. The iShares MSCI Russia ETF charges 0.65pc to track a basket of 22 stocks.

‘We think Russian shares will fall further in the short term’