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2011/2012 political backdrop will see increased social spending
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Late cyclical recovery makes Russian economy resilient
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Consumer spending is on the up, supported by loan growth
Baring Asset Management (Barings), the international investment management firm, believes Russia will become an increasingly attractive market to investors over the next 18 months as its economic recovery continues to gather pace on the back of higher public sector investment and consumer spending.
Matthias Siller, manager of the Baring Russia Fund also believes that over the next 18 months, Russia's political backdrop will have a positive influence on investment opportunities in the country. This year, Russia's Parliamentary elections will take place and in 2012, the Presidential election. Siller explains: "The elections will naturally result in an increase in social spending on infrastructure and on housing as the government tries to secure support. Aggressive fiscal loosening will also put more money in people's pockets and boost consumer confidence, supporting growth."
In terms of GDP growth Barings believes this will remain solid, although Russia's economic recovery has been slower to gain momentum compared to other emerging European nations. Siller says: "Russia's late cyclical recovery means that whilst consumer spending is only just starting to pick up, its monetary pressures are less strained than other European countries. Consumer spending, supported by a revival in retail loan growth since early 2010, points toward a strong, sustained recovery. Evidence of growth in consumption can be seen in rising new car sales which for example are well above Turkey's."
Barings believes the Russian economy has been relatively resilient to the financial crisis, and currently its budget deficit forecasts are significantly better than some other European emerging economies. While other European governments' support of growth via deficit spending comes to an end, Russia is an exception to the trend. A deficit spending increase in Russia will continue to underpin wage growth and consumption. Barings also expects privatisation efforts to increase and generate more growth for businesses.
However, Siller notes that, "Food inflation will slow real wage increases for the time being, but we expect a re-acceleration of real wage growth in the second half of 2011 as inflation levels off. This supports our positive outlook for Russian consumption over the rest of the year."
Siller also highlights that high oil prices are continuing to have a positive impact on the growth of the Russian economy. He believes the Russian equity market is one of the main beneficiaries of high oil prices and earnings upgrades support this view. The economy's liquidity has surged as a result of high oil prices and this means that Russia can afford to increase spending.
Siller concludes: "Russia remains attractively valued against its emerging European peers and we believes that this, along with demonstrable economic resilience, a positive outlook for increased consumption and solid finances, means Russia will become an increasingly attractive investment option for investors."
The Baring Russia Fund aims to achieve long-term capital growth, principally through investment in equity and equity-related securities of companies operating in Russia and, to a lesser extent, the Ukraine and the other republics of the former Soviet Union. Its top sector holdings are materials (29.6%), energy (28.5%), financials (17.7%) and consumer staples (10.9%). *
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