World Cup Boost Will be Short-lived for Russia

Newton Investment Management's Naomi Waistell comments on the outlook for the Russian economy and equities ahead of the World Cup

Newton Investment Management 12 June, 2018 | 12:28AM

This Perspectives article is part of Your Guide to Emerging Markets. All this week, we are focusing on emerging markets, sharing their potential pitfalls – and where you can make a pretty penny.

Moscow, Russia World Cup emerging markets eastern Europe

The World Cup is an opportunity for Russia. Many people travel there for the first time and are open to the country and its people. Russia has pumped around $11.8 billion into the construction of stadiums and the associated infrastructure. In my view, however, the effect on the economy will only be short-term.

In the long term, Russia needs structural reforms to ensure a sustained economic recovery. Both productivity in the country and the employment rate are low. The entrepreneurial spirit is weak and the dominance of the state in companies is great: The Russian state holds 60% of the leading index RTS directly. And dependence on the energy sector remains high – Russia exports around 5.1 billion barrels of oil a day, accounting for under 15% of Russian GDP. In 2008 oil exports were around 20% of GDP. 

With a price-earnings ratio of only seven – the DAX-KGV is currently about twice as high on current year multiple – the Russian stock market is at a historic low. However, investors must bear in mind that this discount to the developed markets has existed for a long time.

This is partly due to the permanently low-priced sectors such as energy or raw materials. Moreover, promising consumer or technology stocks are hardly to be found. International sanctions, geopolitical risks and the lack of corporate governance also play a role here.

There are some attractive businesses in Russia, which are well managed and not exposed to the risks of state ownership, where I would be much more cautious to be a minority shareholder to the Russian government. These attractive businesses tend to be in areas exposed to innovative technology and positive consumption trends at low penetration levels. Such companies should benefit from the proposed reforms as well as the better overall health of the economy as it continues to emerge from recession.

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About Author

Newton Investment Management

Newton Investment Management  is a London-based, global investment management subsidiary of The Bank of New York Mellon Corporation. Newton provides award-winning investment products and services to a broad spectrum of clients.

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