Positive long term investment outlook flagged up for Russia

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Written by Ray Clancy

Thursday, 24 June 2010 10:00

The long term investment outlook for Russia is positive despite a difficult 2009 and proposed reforms combined with the broadening range of investment opportunities in Russia can help change the country’s cyclical growth story into a secular one, it is claimed.

Abundant liquidity, sustainably low interest rates, increasing earnings growth and a stable to strengthening currency are just some of the positive reasons for looking at investments, according to Nathalie Wallace, senior portfolio manager on the Legg Mason Batterymarch Emerging Markets Equity Fund.

‘Economic strengths coupled with critical reforms laid out by the Russian authorities makes Russia’s prospects very promising over time,’ said Wallace who also believes that valuations are cheap relative to the other BRIC economies.

President Dmitry Medvedev has called for greater economic diversification, with less state control. Other necessary changes being discussed include establishment of the rule of law and ethical behaviour in government and business, as well as financial reforms.

Changes are needed, Wallace points out. For example, Russia requires an effective and independent bank regulator to permit the expansion of a secure, well-capitalised private banking system. The country also needs transparent corporate lending practices and better accounting and reporting standards.

In addition to this, pension reform that permits investment in the domestic stock market should help Russia develop a larger local investor base, making it less reliant on outside sources of capital.

Another positive development in Russia is that while public debate in the country focuses on the state’s role in modernising and diversifying the economy, companies in the private sector, including retailers and manufacturers, have gradually been making progress through corporate consolidations, joint ventures with non-Russian companies and other actions.

‘Russia’s substantial energy resources have made it a key player in the global economy. Yet unlike the other BRIC countries, Brazil, India and China, Russia experienced severe economic difficulties during the worldwide recession,’ said Wallace.

‘However, a sharp upswing in oil prices has helped propel the Russian economy back on a growth trajectory, with the International Monetary Fund forecasting a 3.5% jump in GDP for 2010. Higher oil prices have also bolstered the Russian stock market, whose constituents, energy related or not, are often more correlated with global energy prices than dedicated energy stocks in other countries. The increase in oil prices is therefore benefiting industries from telecommunications to banking, and investors can find a broad range of opportunities based on positive underlying company fundamentals,’ she explained.

Wallace expects the breadth of attractive long term investment opportunities in Russia to continue to grow. ‘While the market remains dominated by resource stocks with Gazprom, the world’s leading natural gas producer accounting for roughly 25% of the MSCI Russia Index, a stronger ruble and domestic cost pressures are expected to cap earnings growth for these companies,’ she said.

‘This should help open the door for companies in sectors related to manufacturing, consumer demand and infrastructure development, which are currently underinvested and should benefit as inflation continues to drop. In addition, analysts predict a resurgence of IPOs after a hiatus in 2009,’ she added.