Russia tops emerging markets

Many people invest in Russia as an energy play. While that’s a good strategy, says Stephen Burrows, many don’t realize it’s also a great market to play the consumer theme.

“Higher oil prices eventually filter through to Russian consumers,” says the senior investment manager and product specialist for the Emerging Markets Equities team at Pictet Asset Management.

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Burrows adds more than half of government taxes come from oil, so infrastructure is another place where investors should focus their attention.

Investors have typically steered clear of Russian companies due to corporate governance concerns, but Burrows says rising dividend yields indicate better standards may be on the way.

Many companies are offering yields over 6%, and the average dividend yield on the Russian market is 3.7%, which is higher than the emerging market average.

Read: Don’t underestimate the power of dividends

Here are three more reasons to add Russia to your emerging market allocation:

1. Valuations

“It’s the standout opportunity across emerging markets,” says Burrows. “It’s trading 5.2 times P/E ratio, which is around half the average for emerging markets. And it’s the only emerging market still trading below a price-to-book-value ratio of 1.”

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2. Market reforms

“We are seeing the settlement cycle for Russian equities shortening to T+2,” he says. The country’s also creating a central depository, “which is allowing many investors to invest in Russia for the first time, opening the market to new wealth.”

Read: Emerging market bonds defy investor worry

3. Large consumer class

Russia has the largest population in Europe, and “the size of the consumer market has just overtaken the UK’s, and is second only to Germany. We find many interesting stocks in the retail and banking sectors where you can play very strong consumption growth.”