Russia is cheap for a reason, says JPM’s EM chief

Russian equities look exceptionally cheap but they don’t tell the whole story of how vulnerable the market is to wider energy price shocks, JP Morgan’s CIO for emerging market equities has said.

Richard Titherington, who runs three emerging funds at JP Morgan, made the comments in a video conference during which he discussed his major concerns for the emerging world.

He said: ‘Russia is cheap but perhaps that is for good reason. It is 90% correlated to the stock market through energy prices. It is as cheap as it has been for some time but that will not help you if energy prices go in the wrong direction.’

Russia is currently well represented in his three EM portfolios, with a slight overweight in both the JPM Emerging Markets Opportunities and the JPM Emerging Markets Alpha Plus funds. He has an underweight in the JPM Emerging Markets Infrastructure fund.

When it comes to stock picking, Titherington said he was cautious on commodity stocks at present and has zero holdings in emerging market fund giants such as Gazprom, which he describes as a value trap, Petrochina and America Movil. However, he does hold Cnooc and Petrobras.

‘Gazprom has got a lot of publicity over the past six to 12 months and a lot of people are saying things are different this time and, in my 25 year career, I think that is the most expensive phrase you can hear,’ he said.

Oil shock

The fund manager also touched on the topic of a potential oil shock caused by conflict in the Middle East – a subject of debate among fund managers. Titherington said he thought concerns were overstated.

‘If something happens there then prices could spike and that will be detrimental for economic growth. But not for all the global emerging markets, I think it is important for which part of the emerging market sector you want to be invested in.’

‘Obviously, the biggest commodity markets – Brazil, Russia and South Africa, to some extent – will benefit from rising energy prices, whereas countries like Turkey and India will be negatively affected. It is important in terms of where we want to invest but I don’t see it derailing the emerging market story one way or the other.’

Titherington’s best performing fund over the past 12 months is the JPM Emerging Markets Opportunities fund, which has returned 5.99%. Its benchmark, the MSCI EM (Emerging Market) TR rose 0.19% over the same period.