Russia offers the best equity investments

PUBLISHED : Sunday, 18 September, 1994, 12:00am
UPDATED : Sunday, 18 September, 1994, 12:00am

THE former Soviet Union offers the best equity investments among emerging markets, according to investment adviser Marc Faber, managing director of Marc Faber Ltd.

'The political, social and economic problems have produced a tremendous under valuation of financial assets in the system,' Mr Faber said.

'In hyperinflation economies, you often get unbelievable under valuation of financial assets because the currency depreciation exceeds the local inflation rate.

'This has happened in the former Soviet Union since late last year. Many shares are up between four and eight times in US dollar terms since start of the year.' Under Russia's successful voucher-based privatisation programme, about 15 per cent of industry had been privatised by June last year.

Mr Faber has calculated that with the current voucher price of about US$12 (about HK$93), all of Russia's industry is being valued at between US$5 billion and US$6 billion.

Mr Faber said the oil sector offered some of the best opportunities.

Russia's biggest oil company, Surgutneftegaz Oil and Mining, produces about two per cent of world output but has a market capitalisation of US$600 million.

The stock has risen by 900 per cent in dollar terms since early this year, from less than US$3 to US$27.

'In Russia, most oil companies are capitalised at about 20 US cents per barrel of proven oil reserves, whereas, in the West, most companies such as Royal Dutch, Mobil and Texaco sell at US$5 to US$6 per barrel,' Mr Faber said.

'I am not saying the Russian companies will start selling at US$6 per barrel, but they could move to US$1, which would lift their prices by five times.' Other under valuations were apparent in the motor industry and the US$40 million market capitalisation of leading Moscow retailer Gum Department Stores.

The Port of Vladivostok is capitalised at about US$25 million.

The collapse of the rouble is the main reason for the undervaluations. This has had a direct affect on foreign currency values but it has also been hit via the privatisation plan.

The plan used the book values of companies to be privatised at their July 1992 level. The rouble has since fallen in value by about 90 per cent.

Management and workers, as early shareholders in the privatisation targets, had an incentive to understate the book values.

Foreign investment in Russian stocks has only been possible since the privatisation programme was begun in June 1992. Under the most popular scheme option, management and workers receive an immediate 51 per cent of the privatised company. A further 29 per cent is sold to the public in voucher auctions.

Since the programme began, about 7,000 medium-to-large companies and 90,000 smaller companies have been transferred into the private sector.

Stock exchanges have been set up in Moscow, St Petersburg, Vladivostok and Ekaterinburg, although most trading to date has been outside the exchanges.

Settlement is often a problem in emerging markets but Mr Faber said this was not the case in the former Soviet Union.

For those investors seeking a somewhat more conservative investment than Russian stock, Mr Faber suggested Russian Foreign Loans, now trading at about 30 cents to the US dollar of face value.

Mr Faber said Russia was unlikely to end up with a debt forgiveness plan such as the Latin America Brady structures, but rescheduling was likely as the country's debt was relatively small proportionate to its economy.

Only high-net-worth investors were suited to investing in emerging market debt because at least US$1 million to US$2 million was needed for proper diversification. Mr Faber is chairman of the Firebird Fund, an offshore fund run out of New York, which has more than doubled in the past three months.