Economy will remain strong even if oil price falls following 9% production gain in 2002
The Russian economy will have a good year irrespective of risks to oil prices, according to Mark Robinson, manager of the JP Morgan Fleming Russian Securities.
He believes investors in the country, which remains heavily dependant on global energy prices, do not appear to have priced in the current high oil cost environment. He said: 'Should the oil price fall, we believe Russia will be comfortable with prices even in the mid teens, given a 9% oil production gain in 2002, further increases expected this year and fiscal prudence. Anything above that level will help fuel the consumer boom.'
Like Robinson, John-Paul Smith, manager of the Eastern European Trust, has few reservations about Russia's economic outlook, even in the event of a sharp decline in oil prices. If anything, he said, the pace of reform is picking up, notwithstanding parliamentary and presidential elections over the next 18 months.
Both land and banking reforms are likely to increase Russia's medium-term trend GDP growth by up to 2% over the next decade, he added.
Although Russians enjoy a high standard of education, an abundance of natural resources and will benefit strongly from growth in the Chinese economy in the long term, Klaus Bockstaller, manager of the Barings Emerging Europe trust, said investors should remain cautious.
He disagrees with Robinson and Smith, believing the region is at risk from a lower oil price and a weak US dollar, which will harm export margins, as well as a generally weaker demand for Western economies.
Still, he is impressed by Russia's capacity to invest in itself. He said: 'We are particularly encouraged by increasing evidence of a major slowdown in flight of capital because of a greater willingness by Russians to invest in their own country.
'The market remains dominated by oil companies, which are extremely cheap by global standards. We also anticipate an increasing number of companies with exposure to strong growth in domestic consumption to come to the market.'
Following the Eastern European emerging market's near 100% outperformance of the MSCI world index since the end of the 1999, Smith is optimistic about the prospects for the region but warned careful stockpicking is the key to successful investment in the region.
Overall, he said valuations appear inexpensive and there are big discrepancies between countries and sectors. In central European countries such as Hungary, Poland and the Czech Republic, Smith favours the industrial and pharmaceutical sectors.
Bockstaller said Eastern Europe has outperformed because of significant restructuring at both the micro and macro level in recent years.
He added: 'Currencies are still competitive and labour markets are more flexible relative to developed countries like Germany. Most companies in central Europe have now restructured and some are majority-owned by international companies.'
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