Despite inflationary worries and the Georgia conflict, the Russian economy is still experiencing a boom, according to JP Morgan.
Oleg Biryulyov, portfolio manager of emerging market equities at JP Morgan Asset Management, says Russia’s domestic-driven economic expansion remains well supported, with domestic investment growth rates jumping from 12% to 17%.
The main drivers of growth are shifting from net exports and consumption towards investment and fiscal expansion, he says.
“Russia is still in a boom in the economy. GDP growth is still 8% this year... We will see noise about inflation in the next 3-6 months but the worst is probably behind now.”
He believes Russia will probably use micromanagement to control inflation, which in the long-term is less attractive to investors but is quicker, he says.
The country has also experienced a massive increase in real income, growing 15% in five years. GDP is now 10,000 per capita, making Russia’s consumer market very attractive, says Biryulyov.
He does not think Russian consumer stocks are overpriced, compared to China.
“You need to look at company valuation and the opportunity for growth. Russian banks are relatively expensive because they don’t have problems with their borrowers. If the economy grows 20%, banks will have to grow too, but if they work hard, they could grow by 40%.”
Biryulyov believes commodities are still a play, as “food plays a significant part in the consumer basket”. As a share of the CPI basket, food accounts for approximately 40%.
He does not think the impact of the Georgia conflict will be long lasting.
“Almost close to zero of the Russian economy is exposed to Georgia. Economic relations with Georgia are insignificant… The market has probably over-reacted to the Georgia conflict.”
The Georgia conflict probably accounts for about 8% of the Russian market's recent 30% drop, with 20% affected by a huge commodities sell-off and a fall in oil price. The market is up 5% since the conflict ended, he says.
However, one impact of the conflict will be fewer newcomers to the Russian market. Biryulyov considers the situation has lowered people’s risk appetite and new investors are needed to take risks and push the market forward.
“However, if companies continue to produce good results, pay dividend yields and multiples stay attractive then investors’ moods will swing back,” he adds.IFAonline
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