To adapt Winston Churchill, Russia’s market is an opportunity, wrapped in scepticism, inside a recovery story. The Moscow market was one of the world’s worst performers in 2008 as the economy nosedived and investors panicked, then one of the world’s best in 2009 – even while gross domestic product shrank 7.9 per cent. Yet, notes UralSib, an investment bank, investors are reluctant to be overweight Russia in their portfolios. More than in other emerging markets, investing entails a big bet on the broader global recovery continuing, and oil staying at $70-plus levels – a bet investors are not necessarily ready to make.
Assuming the status quo holds, however, Russia has decent chances of outperforming. With sovereign debt below 2 per cent of gross domestic product, Moscow is immune from default fears and overall levels of debt in the economy are low compared to its Bric peers. Last year’s budget deficit came in better than planned at a manageable 5.9 per cent; this year’s 6.8 per cent target is based on very cautious assumptions. Consensus economic growth forecasts have ticked up to 4 per cent, and might prove lightweight if consumers start spending again. Real incomes actually grew 1.9 per cent last year, but nervous Russians hoarded them; the savings rate doubled from July 2008 to 14 per cent by end-2009. A fall to, say, 9-10 per cent would pump a lot more spending into the economy.
With oil prices still below pre-crisis highs, and Gazprom’s export outlook murky, investor interest is shifting from oil and gas to consumer-led stocks – retail, mobile telecoms and consumer goods. Meanwhile, government plans to pour resources into rebuilding clapped-out infrastructure could favour power companies and some materials suppliers.In spite of all these opportunities, Russia’s stock market, on a forward price/earnings basis, remains among the world’s cheapest; its rating is around half that of some emerging market peers, a larger discount than can be justified by political and corporate governance concerns. As long as investors remain skittish about broader risks, however, Russia may remain out in the cold.