Russia geared into global economic recovery

Comment by Gareth Morgan, Fund Manager, Emerging Equities, F&C: The confirmation through stronger growth data that the major economies are emerging from recession can only be good news for investors in Russian equities. Dominated by its vast commodities sector, the Russian market is highly geared into global demand and the resurgence of India and China, as well as the return of growth to near neighbours Germany and France, should help significantly boost export revenues. In a climate of improving risk appetite, Russia can therefore be expected to outperform.

Better confidence

The most effective way of assessing the true state of an economy is to see for yourself on the ground and, on a recent trip to Russia, I was encouraged by the brighter confidence of the companies I met. On the whole, company managements feel they are through the worst and are now in a period of stabilisation. They admit, however, that they have low visibility as to the timing and magnitude of a recovery.

Consumer companies seem more comfortable with their outlook. Mobile telecoms operators, for example, feel that the low point in their fortunes was the first quarter. Now they are seeing usage and pricing trends are picking up. Retailers with a discount format are also making gains and, for the first time in many years, the sector's valuation is looking attractive relative to its global peers.

Social spending to boost consumer stocks

A further fillip for the consumer sector is the prospect that next year's budget will see an increased emphasis on social spending at the expense of other areas such as infrastructure. Therefore, consumer-related stocks should be much better placed than those that require improved investment spending.

While the market overall looks well set, there is likely to be strong divergence of sector performance. The core area of oil and gas, for example, has few catalysts for outperformance. Oil companies are unlikely to materially benefit from further tax incentives this year, whilst the valuations of the likes of Lukoil and Rosneft relative to global peers are not as appealing as they could be. The prospects are nevertheless a little brighter for gas giant Gazprom as customers in Western and Central Europe will need to replenish stocks ahead of the winter season, whilst it seems unlikely that there will be any increases in export duties this year.

In the steel and mining sectors, stocks are likely to continue to enjoy the momentum from increased export demand through the third quarter. However, signs of a domestic pickup will be needed to sustain it unless global steel prices pickup sharply.

Macro data to improve sharply

From the end of the third quarter, the base effect alone will make macro economic data look very positive. While this may spark enthusiasm for the market, investors need to be mindful that, with the both the banking system and domestic industrial production still very fragile, Russian equities are highly vulnerable to any further correction in global markets.

Russia is a useful beta play on the global economy. For investors who believe that a sustainable recovery is on the way, this potentially dynamic market is a proposition worthy of close consideration.