East Capital, an emerging markets-focused asset manager headquartered in Stockholm, argues {{{*}}} that domestically-oriented and consumer-related sectors offer the best investment opportunities in Russia.
According to East Capital’s chief investment officer, Peter Elam Håkansson, today’s Russia is a country with a “strong economy”, one of the world’s strongest balance sheets, domestically-focused sectors experiencing double-digit growth, and a large, growing and increasingly prosperous middle class.
“We approach Russia in a different way compared to many other investors who see Russia from the perspective of the index where commodities and oil make up a large part,” Hakansson says in comments posted on the website of his firm, most of whose $5.3bn in assets under management is invested in Russia.
“From 2002 to 2011, Russia experienced strong GDP growth of 4.9% per year, but household consumption experienced even stronger growth of 10.6% annually. Since we started East Capital in 1997, annual income for Russians has grown sevenfold, and this is very visible when you travel in Russia,” he says.
His comments are very much in tune with the strategy of Sberbank – a month ago, the biggest Russian lender’s investment banking arm, Sberbank CIB, released an extensive body of research purporting to prove that it is consumer-related industries and not oil and gas that should top the agenda of those who are planning to invest in Russia.
“Companies exposed to the strong domestic economy have completely different growth profiles compared to export orientated companies in Russia. The domestic market offers huge room for organic growth because of low penetration levels compared to the European average across most sectors,” Hakansson says.
“Consumption will continue to rise as real income rises faster than GDP. Record low unemployment, inflation at an all-time low, unleveraged consumers and improving demographics all set a good backdrop for this. The consumer middle class is expected to triple by 2020. Infrastructure investments are also set to accelerate in Russia, not least because they are hosting the Winter Olympics in Sochi in 2014 and the Football World Cup in 2018.”
Taking advantage of a situation where one can “buy into growth at a discount”, East Capital has launched a fund focusing on Russia’s domestic economy, East Capital Domestic Growth Fund.
“Oil companies have been cheap in Russia, while investors have had to pay more for growth, and rightly so. But valuations dropped in the turmoil following the parliamentary elections in December 2011, and now these companies trade at very low price-to earnings multiples. In this situation, when it became possible to buy into growth at a discount, we launched the East Capital Domestic Growth Fund and increased our domestic exposure,” Hakansson says.
Hakansson may, however, be slightly over-optimistic when he says “corruption is now addressed” in Russia.
Russian Prosecutor General Yury Chaika has been chiding law enforcement agencies recently for allegedly slackening their anti-corruption efforts.
At a conference in Moscow today, he said the prosecution service felt “uneasy” about annual decreases of about 10% in registered numbers of bribery and abuse of office cases, according to Russian news agency Rosbalt.
President Vladimir Putin, who was present at the conference, “demanded more intensive action against corruption,” Rosbalt said.
It has been claimed widely that November’s sacking of Anatoly Serdyukov, which was cited by Hakansson, was a personal settling of accounts and not part of a corruption inquiry as alleged officially.
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