Global Investing

Money in containers. Many see big bucks in Russia’s infrastructure push

February 20, 2012

A lot of things are wrong with Russia, one of them being its rickety infrastructure.

Many see this as an investment opportunity, however, reckoning the planned $1 trillion infrastructure upgrade plan will get going, especially with the 2014 Winter Olympics and 2018 soccer World Cup looming. Bets on infrastructure have also gathered pace as the Kremlin, seeking to placate a mutinous populace, has pledged reforms, privatisations and a general push to reduce Russia’s dependence on oil exports.

Takouhi Tchertchian at asset managers Renaissance says one sector – shipping containers — reflects the potential for gains from infrastructure improvements. Such containers, usually made of steel, can be loaded and transported over long distances, and transferred easily and cheaply from sea to road to rail.  But Russia has among the lowest levels of containerisation in the world, at around 4 percent compared to the emerging markets average of 15 percent, Tchertchian says. Even in India, almost 3o percent of goods travel by container while in a developed country like Britain, the figure is 40 percent.

Containerisation is a play on people getting richer and demanding more goods. Diversification of the economy will also push the containerisation rate higher. The more consumer demand is part of the economy, the more the demand for containers. If the containerisation rate goes to 6-8 percent, that will give you a doubling of profits. (Tchertchian says)

She favours logistics firms Sesco and Transcontainer. The latter holds 60 percent of the market and last month reported a quadrupling of nine-month profits. True, both companies trade at a premium of 20-25 percent to the broader Russian market but earnings growth is three times higher than the market average, she says.

Russsian stocks have done well since the start of 2012, primarily due to the risk appetite rebound worldwide and high oil prices. All recent data has also been buoyant, indicating the economy likely grew by an above-target 4.5 percent last year. Subdued inflation and strong consumption is buoying industrial production.

Renaissance calculates that poor infrastructure causes a drag of 2 percentage points a year on Russia’s economic growth. And it argues that the mass protests following December parliament election are ample proof the government simply cannot afford to put off  investments. Tchertchian notes that Russia’s GDP growth has slowed to around 3-4 percent a year from the average 5-6 percent it enjoyed in the years before 2008. She adds:

That was thanks to commodity prices, so we have already enjoyed the low-hanging fruit. Now that we have entered the new reality of softer growth, capturing that 2 percent additional growth is going to matter a lot more.

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