Russia’s invasion of Ukraine disrupted investor confidence in eastern Europe. Now, some investors have begun to wonder whether stocks in the region have plunged enough to become attractive again.
Dave Iben, chief investment officer at $6 billion manager Kopernik Global Investors, told II that the firm is actively exploring opportunities in eastern Europe, including Russia and Ukraine. He said that because many countries in the region are rich in commodities, they present very attractive opportunities in an inflationary environment. The Kopernik investment team is currently visiting companies in the region to update their research.
“Inflationary monetary policy eventually migrates into commodities,” Iben said. In the eight inflationary regimes since World War II, commodities in aggregate have generated an annualized real return of 14 percent, according to a 2021 paper by five scholars affiliated with the Man Group. Real assets, in general, are expected to protect investors better than the traditional stock and bond portfolios.
Iben said that Kopernik is currently studying eastern European stocks in commodity-related industries such as mining, agriculture, utilities, and industrials. Some of these stocks are extremely undervalued due to the Russia-Ukraine conflict. For example, the price-to-earnings ratio of the Ukrainian agricultural and industrial company Astarta is merely 1. Its enterprise value per acre of farmland, meanwhile, is $214, compared with $19,326 for Gladstone Land and $13,852 for Iowa Farmland, two American farmland companies, according to data from Kopernik.
Poland is another eastern European country that has drawn investor interest. Brandon Pizzurro, director of public investments at $20 billion GuideStone Capital, said his team is overweighting Polish stocks, especially those in the consumer landscape. “That’s one of the countries that, just because of its proximity and [concerns about a] spillover effect [from the Ukraine war], people really sold out of,” he told II in an interview. He added that many investors worry that countries peripheral to the center of the war could be economically weakened.
Unlike the many investors who have divested from Russia in response to its invasion of Ukraine, Iben and his team at Kopernik haven’t shunned Russian assets. The firm has invested in the Russian energy company Gazprom, hydroelectricity company RusHydro, real estate developers LSR and Etalon, and the financial services company Sberbank. As of early April, RusHydro and Gazprom were only trading at 50 percent and 60 percent of their book value, respectively, according to Kopernik data.
In an April webinar, Alissa Corcoran, analyst and director of research at Kopernik, explained the distinction that the company makes between investing in Russian companies and supporting the Russian government. “When we are buying Russian companies, we are distinguishing between investing in the Russian government and investing in the people, the culture, the assets, the franchises of Russia,” she said, adding that selling shares of Russian companies on the secondary market doesn’t necessarily hurt the Russian government.
Iben added that he thinks the real risks for investors are risks that “people aren’t worried about.” In that sense, Russian assets and a lot of eastern European stocks have lower risks than some of those in the U.S. markets. “Once [investors] become worried about the risk, they price it in [and the asset] becomes less risky,” he said. “If you can buy things for too cheap of a price, [the risk is] actually lower.”
“Do we want to invest in these places? Of course — that’s where the value is. But are we a little bit afraid of these places? Yes, because they famously have corruption,” he added. “Therefore, we try to [only invest] in good companies, and with discounts that are too big.”