* Valuations, oil price rise boosting Russia stocks allure
* Investors bet cyclicals will gain from inventory rebuild
* Weak Russian economy, global growth doubts dog market
By Sujata Rao
LONDON, Sept 25 (Reuters) - Cheap valuations and optimism about oil and the world economy are luring cash back to Russian stocks, with investors betting the market will benefit more than most from a sharp rebuilding of global inventories.
Moscow's dollar-denominated index <.IRTS> is up 16 percent in September after gains of 5 percent in August, outgunning an 8 percent gain in the broader emerging equity market <.MSCIEF>.
The index has almost doubled this year, a stark contrast with 2008 when it was one of the worst performing emerging equity markets. Momentum has grown as investors became more hopeful a recovery was on the way in the United States and elsewhere.
Add to that, stock valuations that are twice as cheap as those in Asia -- in terms of multiples of forward earnings -- and the comparative case looks compelling.
The latest fund manager survey by Banc of America/Merrill Lynch showed Russia topped investors' list of overweights, while they went underweight China for the first time in over a year. Net overweights are 44 percent now versus zero in April.
"In the first phase of economic recovery, you want to be positioned in cyclicals not consumption," said Credit Suisse analyst Robert Ruttmann, who put Russia on overweight in July.
"As (consumer) demand has picked up in the past couple of months, we have seen high levels of de-stocking so companies will need to buy things like oil and steel."
Cyclical stocks are those which rise in value during an upturn in the economy, like airlines or commodities.
Energy stocks make up 70 percent of the MSCI Russia index compared to 15 percent for the broader MSCI emerging index and analysts surveyed by Reuters expect oil to average over $73 a barrel in 2010 up from a forecast in January of $55.
That should lift Russia's economy from a 10-percent contraction in the first half of 2009.
Nor will the country suffer from its lack of a well-developed manufacturing base as unemployment continues to rise and consumers save rather than spend to secure themselves against the fallout of the credit crisis.
"People wont be consuming as liberally as they did in 2007 so what is outperforming now and what will outperform throughout the first phase of recovery, are the cyclicals," Ruttmann said.
VALUATIONS
Moscow's stock market was one of the hardest hit in the carnage that followed the collapse of Lehman Brothers last September, plunging over 75 percent versus a 55 percent loss for the broader emerging index. That made valuations very cheap.
Michael Penn, global equity strategist at Banc of America/Merrill Lynch says Russian stocks still trade at an average 8 times forward earnings versus over 15 times in China.
On a trailing basis, reflecting price ratios to most recent 12-month results, the Russian discount to emerging markets is 50 percent, he says, versus a historical average of 20 percent.
"Russia stands out as a big value play," Penn said. "Oil prices are on the rise and risks around the rouble have reduced. The missing ingredient has been the economy and even here there are some signs the Russian economy is improving."
Asian nations India, South Korea, Malaysia and Taiwan joined China as fund managers' most significant underweights.
"Russia is a high-risk, high-reward market, much more than China. If the global economy manages to recover on a sustainable basis it's probably better to be in Russia," said Claude Tiramani, who manages over $5 billion in China and east Europe at BNP Paribas Asset Management in Paris.
CHEAP FOR A REASON
But there are doubts and Tiramani himself has still increased allocations to China after the recent market dip and notes that the very rise in oil prices that is luring people to Russia could choke off nascent global growth.
"People are betting on a global recovery but I see 10 percent growth in China as more likely than a strong global recovery at this stage," he added.
Russia has failed to diversify out of oil and other resource industries and domestic demand is weak, while memories of past corporate bust-ups mean governance and state interference remain issues for some investors.
While India and China will post 6-8 percent growth this year, Russia is still in recession, notes William Calvert, fund manager at Axa Framlington. He has avoided Russia for a while on worries over transparency and structural weakness.
"Russia is cheap for a reason -- the long term investment story is very poor," he says.
"The big story in emerging markets right now is disinflation supported by strong currencies, which is allowing interest rates to fall to record lows in many places. In Russia that is not happening, they are not benefiting from this trend."
(Editing by Patrick Graham)