Back in early 2009, at the height of the global financial crisis, I predicted that the market to watch was Brazil. I thought Brazil offered the strongest prospects for investors and businesses looking to tap into its rapid growth fuelled by domestic consumption, infrastructure investment and intra BRIC trade. In truth, this wasn't a difficult prediction to make and I wasn't alone in making it. Over the last two years the Brazilian economy has grown by 15 percent, the Real has risen by 46 percent and the Bovespa has climbed a staggering 213 percent since its lowest point in 2008. Last week I chaired a panel of Brazil experts at the AISES From Delhi to Rio event, and there is no doubt that an increasing number of foreign companies are now looking to tap into the close to US$100 billion investment which has been announced so far as the funds set aside to invest in hosting the FIFA World Cup in 2014 and the Rio Olympics in 2016. A further 1 billion was pledged last week during President Obama's visit to Brazil and it seems that it will be hard to pick up a newspaper soon without reading more announcements, predictions and commentary about Brazil's future influence on the global economy. So, here is my prediction for 2011... this will be the year in which the Russian economy will surprise us on the upside, and over the next two years investors and businesses will beat a path to the door of Russia and Eastern Europe! Sounds unlikely? Well read on... I am, as always, very grateful to Michael Hanson-Lawson, Karine Hirn and my friends at East Capital, an independent US$7.3bn asset manager specialising in investing in Eastern Europe, for the great work they do in educating us all on the truth about Russia and Eastern Europe, in contrast to the more negative commentary you read in the press. I am therefore pleased to have their permission to showcase their 3Cs which are aligning to position Russia as the compelling investment story of 2011: Convergence, Consumerism and Commodities:
Eastern Europe is catching up Western Europe through political, economic and financial integration. From Slovenia to Poland, all of the Eastern European countries are experiencing rising incomes, increasing productivity and a substantial growth in consumer spending. Across the 27 countries that make up the 'investable markets' of Eastern Europe, the GDP per capital has increased by 237 percent over the last decade, compared to only 93 percent in the Eurozone.
Let's not forget that, only 20 years ago, following the collapse of the Soviet Union, the whole Eastern European bloc was desperately poor, destitute and downtrodden. Many people lived in severe poverty and the future was bleak and hopeless. Today, Eastern Europeans have high aspirations to catch up, and even overtake, their 'cousins' in Western Europe, and crave a more Western standard of living. They are willing to work hard to achieve this and, with the Eurozone faltering with sovereign risk, bank defaults and high levels of debt, the picture is changing very rapidly. Expect this convergence to continue for many more years and for Eastern and Western Europe to start to look the same. Remember, you don't have to go back very far in history to the time when Europe was one prosperous and united region before the fall of the tsars, the rise of the Soviets and the days of the Iron Curtain!
Russia has the largest consumer class amongst the BRIC countries, the highest GDP per capita, the lowest level of debt, and now leads the whole of Europe in the sale of key consumables eg pharmaceuticals, mobile phones, broadband and even beer (catching up with vodka as the beverage of choice amongst Russians!). According to the recently released Forbes survey of billionaires, Moscow has more billionaires (79) than any other city in the world (the closest is New York with 58) and Russia accounts for a third of Europe's 300 billionaires, and 15 of the world's 100 richest people. Not surprisingly, retail sales in Moscow now exceed Paris and London, and by 2025 the consumer market in Russia, which is now approx. 142 million, is expected to be larger than Germany's, one of Europe's largest markets. The average Russian has a higher disposable income than their Western counterparts. For example, a mid-level executive in the US earning $60,000 per annum has $7,000 left after taxes, credit card debts and mortgage repayments. A mid-level executive in Russia earns $25,000 per year, but has $10,000 left because of low levels of consumer debt. For a whole range of historical, cultural and economic reasons, plus a 13 percent flat tax rate, high home ownership with no debt (a legacy from the post Soviet period in which most Russians were given their homes at no cost) Russians tend to spend their money, rather than saving it, and this is fuelling a retail boom which is now spreading to their Eastern European neighbours and boosting the economy for the whole region.
Russia's economy is already very strong but, as the world's largest oil exporter, will get even stronger during times of high oil prices. The recent unrest in the Middle East have already caused oil prices to rise by almost 25 percent since the beginning of the year (and expected to rise further) and this is already having a very positive impact on Russian oil producers.
Russia's oil production and revenue levels exceed other countries by many times but this isn't reflected in the share prices of Russian companies which seem due for a re-rating at some stage. The same applies to gas, with Russia's state-owned monopoly Gazprom rushing to sell extra gas to European nations when their supplies from Libya ran dry during the escalating violence there. It will also gain from selling energy to Japan, where an earthquake and tsunami have shut down 12 gigawatts of nuclear capacity. The shocking and unexpected events of recent weeks in Japan suggest that that there will be a significant move back to the production of fossil fuels, with Russia likely to be the major beneficiary.
2011 is the year in which Russia will experience a significant turning point in investor and business sentiment. Major foreign companies like Pepsi and BP have made substantial multi-million dollar investments into Russian companies, a new $30 billion privatisation plan has been announced by the Government, an upsurge in IPOs, and Russia's IT hub 'Silicon Taiga' has commenced an IT knowledge exchange with Silicon Valley. If the awarding of sporting events is an early indicator of increasing global confidence, Russia's hosting of the Winter Olympics 2014 and the FIFA World Cup in 2018 is a positive sign, and Russia's accession to full WTO membership this year (which has been 17 years in the making) has recently received the official endorsement and support of President Obama. Of course Russia has plenty of problems and challenges (who doesn't these days?!) all of which get regularly aired in the western media, but none of them justify the 38 percent discount to which Russia trades against other global emerging markets which is bound to correct itself in 2011. I have been invited to lead a delegation to Russia later this year to attend one of East Capital's regular investment forums. Please contact me if you'd like to join us...