Since 2004, 80% of Russia’s domestic growth was delivered by domestic consumption, not the extractive industries, and yet the stocks in the consumer sectors are weighed down by the risks attributed to the energy sector, strategists at Russian bank Sberbank said in a report.
The world’s biggest country by surface is set to become Europe’s largest consumer market and the fourth-biggest in the world by 2020; still, the aggregate Russian consumer sector is trading on a 25-50% valuation discount versus Brazil, India, China and South Africa, the strategists said.
“Consumer sector valuations are anomalously depressed because of Russia’s oil risk image,” the report said. “We forecast Russia’s listed retail sector revenues will grow by around 23% in 2013.”
“An undiscovered secret is that Russia is as much a consumer story as it is an oil proxy,” Andy Smith, head of equity research at Sberbank Investment Research, said in a statement.
“But because two-thirds of the stock market is made up of stocks in extractive industries, the remaining one-third - those companies which contribute 80% to economic growth – have tended to be penalized by a lack of understanding.”
The report identified the most attractive sectors as consumer retail, agriculture, financials, telecommunications, media and IT, real estate and transportation and industrials.
Among the so-called BRIC countries (Brazil, Russia, India and China), Russia has 55% of households classified as middle class, compared with 30% in Brazil, 21% in China and 11% in India, the Sberbank strategists said.
Wealthy households are also more prevalent in Russia; 15% of them have income above $50,000 compared with 5% in Brazil, 2% in China and 1% in India.
MERGERS SEEN UP
Among other advantages for the country’s consumer sector, analysts mentioned the low level of household debt – just 8% of gross domestic product – compared with 65% in Germany and 100% in the UK, and the low level of sovereign debt to GDP – of around 12% - which would allow the government to stimulate the economy should a global slowdown hit it hard.
Another, less obvious trade than the “long Russian consumer” one is betting on mergers and acquisitions in the sector, which are expected to pick up. “We believe that many Western companies faced with a period of prolonged slowdown in their core developed markets are likely to seek further growth opportunities in the BRIC and other economies by means of M&A, joint-ventures or strategic alliances,” the Sberbank analysts wrote.
They also noted that, away from the extractive sectors of oil and gas, metals and mining and closer to the consumer-oriented sectors, the available free-float increases, state ownership (and therefore, influence) decreases, as well as ownership and influence by oligarchs, while concentration levels diminish and corporate governance improves.
“In other words, in the third of the Russian equity market linked to consumer sectors, most of the net negatives that many fund managers associate with Russian investment risks (and contribute to the valuation gap) may, in fact, be illusory,” the Sberbank analysts wrote.