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Comment: Marshall Spectrum Market Outlook for Russia in 2011

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Michael Kart (pictured), Managing Partner and Fund Manager at Marshall Spectrum, the emerging markets equity manager specialising in Russia and CIS, comments on his market outlook for Russia and on what he believes to be the big themes in the region in 2011.

Emerging markets will continue to be the engine spurring the world’s growth over the next years and Russia as the world’s main storehouse of raw materials will provide the necessary fuel for that. If we take a look at the country within the BRIC context, we notice that it has by far more natural resources, a more educated population, a higher proportion of the middle-class, a strong macroeconomic framework, a better track record and is cheaper.  For instance, in terms of Price-to-Book-Value and Price-to-Earnings ratios, Russia is the cheapest major market among GEM (Global Emerging Markets) and it is well known that the valuation starting point is usually key in emerging markets.  
 
Contrary to popular belief, according to various studies performed by institutions such as World Bank and the International Monetary Fund, Russia compares well with its peers on metrics like ease of doing business, market size, transparency, infrastructure, penetration, dividend yield and ROE (return on equity). As we all know, ability to generate high levels of ROE for an extended period represents another important element to attract investors. In that respect, Russia offers a high level of macroeconomic strength and political stability and it enjoys the capacity for high corporate growth thanks to low penetration and large amounts of assets. It also exhibits structurally high ROE thanks to low levels of competition and low cost structures.
 
In summary, we see Russia and its surrounding areas, to be an extremely attractive investment prospect for 2011.   

Big themes for Russian economy in 2011:
 

  • Earnings growth – one of the highest according to Institutuonal Brokers Estimate System (I/B/E/S) dollar denominated growth is going to be extremely high given expected real rouble appreciation over the next 12 months
     
  • Ongoing reform across various sectors, specifically power utilities and fixed-line telecoms, will create big opportunities in 2011.  Another area set to be reformed is oil & gas taxation, this will also open up attractive opportunities in the market.
     
  • Strong domestic liquidity in the banking sector leading to loan growth will continue.  The banking sector is also set to benefit from increased inflationary expectations starting from the second quarter in 2011
     
  • Government spending on infrastructure is due to rise leading to many interesting opportunities in this space
     
  • Russia remains one of the cheapest markets among GEM on both relative and absolute basis and we hope to see a catch-up next year

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