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10 years ago, Russia was still emerging from a financial crisis, a debt default and devaluation of the Ruble, but is today sitting on the world’s third largest foreign currency reserves, the state and indeed the average Russian is debt free, and the country's output of natural resources that the emerging world so desperately needs to fuel their economies is near an all-time high. 

Even so, the Russian market is trading on a price/earnings (PE) ratio of 7x, little changed from the 6x it was trading 10 years ago. Compare that with the other so-called Bric nations: the Brazil market, for example, is trading on a PE of 14x, yet its economy is just as dependent on commodities and its population is a lot less well educated and wealthy than in Russia. 

"Valuations today in Russia are the same as 10 years ago and many Eastern European markets have not really recovered from the crisis," said Peter Elam Hakansson, Chairman and Head of Portfolio Management at East Capital. "You do have to factor in the risk and volatility factor, but we think it's exaggerated right now." 

Jacob Grapengiesser, a partner of East Capital, said the dichotomy between what is happening on the ground and the perception in the minds of foreign investors marks a wide divide which will eventually be closed. And when sentiment reaches such a trend turning point, that's when the biggest gains can be made.

A sign of how that turning point might have been reached is when one looks over the past six months, the stories about Russia have definitely taken on a more positive tone. An example would be the way Russia behaved and was perceived to have behaved during the tragedy of the late Polish president's plane crash.

"The risk premiums are overstated and the market is too cheap," Grapengiesser said. "In our minds, the markets are misunderstood and risks are oversold."

East Capital’s funds have already benefited from the turning in sentiment toward the region over the decade leading up to the global economic crisis. Its Russian Fund returned 1,565% over the decade 2000-2009, the best-performing onshore regulated fund out of the roughly 94,000 other funds the average investor could have put his or her money in. Its nearest competitor returned 1,380%. Over the period, the Russian stock market was up about 780%, while an investor in the US market would have lost 26% and 5% in the European market. Elam Hakansson says, paradoxically, 2009 proved to be an excellent year for performance – its broad-based Eastern European fund outperformed the index by 23% - which is a function of East Capital's philosophy of hands-on investing rather than investing from afar. In 2009, the firm doubled the number of its local company visits. "We want to be out there seeing things for ourselves, not sitting in our offices."

One main reason why Russia and the rest of the region should be revalued is that in macro terms, overall the CEE region came out of the crisis in much better shape than Western Europe, which is heavily burdened by debt. While Russia may not match the 7-8% growth of past years, the 4-5% expected over the next few years is still considerably more than expected in Western Europe and the US.

Comparing Russia with Brazil again, Petrobras is currently carrying out a capital increase that values its oil in the ground at $8 per barrel; for Russian oil firms, it's $2.50. Not to mention of course that Petrobras' oil comes from  hard-to-get-at deepwater areas, while much of Russia's oil reserves being developed are found onshore.

"Lukoil, a well run private Russian oil firm is trading at a PE ratio of 5x, a third of that of Petrobras, and there's no good reason for that," Grapengiesser said.

As such, East Capital is predicting a shift in investment from Brazil to Russia.

Given Russia's prominence in the region, the negativity clouding investor sentiment inevitably has a spill-over effect into the other smaller markets in the region. Take Serbia, a country whose economy was marginally down last year: it is expected to grow this year, is attracting large amounts of foreign direct investment, yet its stock market is still down over 80% from its peak before the crisis. "Polish banks are trading at 2x book value, while Serbian banks are at just 0.3x book value and Russian banks 1.5x book value," Grapengiesser noted. "Serbia will get there eventually, whether in six months, one year or three years, but the trend is there."

It was indeed a remarkable way to conclude my first week in Shanghai that has been full of impressions and discoveries, in a tropical summer heat that my fifteen years in Sweden had not prepared me for, specially not the typhoon warning that closed down all the schools of the city on the first day of the school year (but we got no typhoon by the way).

The Swedish pavilion		Third attempt to get a Chinese mobile phone number

Most of these new impressions are indeed related not to how China is today as such, but how fast it seems to be changing. I guess it is also related to the gap there is between the European perception of China and what you find out once you get here. The pace of changes is not homogeneous; for instance there are 420 million Internet users and as far as I have been able to experience it is a very good Internet infrastructure, but the mobile coverage even in the center of Shanghai is not reliable. Another example that stroke me was the quality of the design and the huge variety of furniture we could see in a shopping mall versus the noisy merchandising display show for detergents in another shopping mall.

The World Expo site itself is of course very impressive because of the size of its area, the creativity exhibited by many countries in designing their pavilion as well as the number of visitors. Chinese people are clearly the primary target audience and it is a perfect occasion for them to take a trip around the world visiting what each country has decided to showcase and highlight. Personally I could only visit the Swedish pavilion and look forward to going back, with a special interest of course to visit the Eastern European countries' pavilions!

Moscow and its surrounding areas have been significantly impacted by the latter. Unfortunately, the weather forecast shows no signs of relief in terms of rain or cooler temperatures until closer to September. Although wild fires are nature’s way of renewing the earth and soil it is extremely sad to see this type of devastation in such a densely populated area.

As far as our portfolio companies are concerned, there might be some short term effects on companies in the agricultural and consumer goods sectors as a fall in crop yields is expected; however, this will most likely be partly offset by higher soft commodity prices. For example, wheat and corn prices are up by 50% and 20% respectively during the last month. East Capital has a few holdings within the agricultural and consumer goods sector. Agro might experience some short term impact on profitability as well as consumer goods due to higher input prices.

Jacob Grapengiesser, Partner East Capital

It was far from being a productive activity as such but it was an exciting time for me to discover the former capital of the Russian empire, meet Soviet students and start learning more about a country that had fascinated me for many years back in my French countryside. What stroke me at that time was the level of decrepitude of these beautiful palaces alongside the canals of the “Venice of the North”, which was sad but compensated by the immense curiosity and overwhelming kindness of the people we met during our stay.

As business trips seldom provide the opportunity to spend time enjoying cultural treasures I was happy to spend a few days of vacation there recently, 20 years exactly after my first visit. St Petersburg is the second largest city of Russia with 4.6 million inhabitants and actually the fourth largest city in Europe. It is also a fantastic cultural centre for Europe. I had chosen the very best time of the year, when the skies never get dark and almost give visitors the feeling that days will never end. The Pulkovo airport is still ridiculously under-dimensioned and traffic jams are worse than ever but a lot has been done to improve the general appearance of the city. This includes fabulous lightening of facades, which is actually a result of a cooperation with my hometown of Lyon in France that has exported its lumière skills to St Petersburg and marvelous renovation work of churches and palaces. There is still lot of work to be done, many courtyards right in the center of the city look exactly as shabby as they were 20 years ago and even some of the Royal palace buildings are in a very poor state. But the improvements are still impressive and the city is truly a destination to recommend to anyone!

Church of the Savior on Spilled Blood (which was built where Tsar Alexander II was assassinated) contains over 7500sqm of mosaics, more than any church in the world. It was badly damaged during the Soviet time and used as a vegetable warehouse. Renovation took 27 years!	Right in front of the Winter Palace we took a speed boat to Petrodvorets, the imperial palace with its famous fountains and often referred to as “the Russian Versaille”. In the back you can see the Peter and Paul Fortress where I used to work back in 1990.
It is 2.30 at night and the sight of raising illuminated bridges to let big ships pass is just fantastic, to be even more enjoyed drinking some champagne with friends.	On our way back after a concert of Vasily Gerello at the Mariinsky Theatre we admired the St Isaac Cathedral, 3rd largest in the world. On the next day we climbed to the observation walkway and got a great view of the city.
How it looks inside the St Isaac Cathedral.