Fund managers in the global emerging markets sector are anticipating a boost to Russian infrastructure spending in the wake of their successful World Cup bid, says Standard & Poor’s Fund Services in its latest update on the global emerging markets sector.
“Despite strong bids from countries with developed infrastructure, FIFA awarded the right to stage the contest to an Eastern European country where much of the infrastructure will need to be developed,” says John Monaghan, emerging markets fund analyst at S&P Fund Services.
The emerging markets team at Raiffeisen believes the World Cup and Winter Olympic Games, due to be held in Sochi in 2014, will be major triggers for infrastructure spending in Russia. Investment in infrastructure, be it utilities, transportation, including road or rail, and ports is key to the future economic development of Russia.
“Raiffeisen anticipates that the hosting of major sporting events will speed up the sometimes slow-moving bureaucracy and improve delivery on these projects,” says Monaghan.
Construction firm Mostotrest was also a significant contributor to performance for the BlackRock Emerging Europe Fund, as investors identified likely beneficiaries of FIFA’s decision to host the 2018 World Cup in Russia. The team at Barings, however, has a more muted view, and does not expect any further infrastructure spending in Russia. At the margin, it feels it may have a slightly positive effect but it will not have a major impact, and does not feel the World Cup significantly changes the investment case. In general, Eastern European valuations were seen as low relative to the other emerging regions of Asia and Latin America.
“Low valuations had a number of causes,” says Monaghan, “ranging from lower standards of corporate governance to being harder hit by the global economic slowdown.”
Markus Brück, manager of the Metzler East European Fund, does not feel the discount is justified and holds the view that low valuations are more a function of the sovereign debt crisis in the peripheral EU economies rather than of internal factors.
Monaghan adds: “Metzler says that this had led to a muted risk appetite in Eastern European countries, and that any sign of an easing of the sovereign debt crisis in Western Europe could be a trigger for better recognition of the region’s fundamentals.”
The emerging markets team at Aberdeen, led by Devan Kaloo, has the opposite view. Its opinion is that Eastern European economies are less robust and the index has a higher weight to cyclical sectors such as materials and energy, which traditionally trade at a discount. However, it expects the discount to narrow somewhat as these cyclical sectors enjoy a period of catch-up after lagging in 2010.
