Russia’s consumers — a promise for the stock market

February 11, 2013

As we wrote here last week, Russian bond markets are bracing for a flood of foreign capital. But there appears to be a surprising lack of interest in Russian equities.

Russia’s stock market trades on average at 5 times forward earnings, less than half the valuation for broader emerging markets. That’s cheaper than unstable countries such as Pakistan or those in dire economic straits such as Greece. But here’s the rub. Look within the market and here are some of the most expensive companies in emerging markets — mostly consumer-facing names. Retailers such as Dixy and Magnit and internet provider Yandex trade at up to 25 times forward earnings. These compare to some of the turbo-charged valuations in typically expensive markets such as India.

A recent note from Russia’s Sberbank has some interesting numbers on Russia’s consumer potential. Sberbank tracks a hypothetical Russian middle class family, the Ivanovs, to see how consumer confidence is shaping up (According to SB their data are broader in scope than the government’s official consumer confidence survey).

The survey found the Ivanovs to be surprisingly upbeat — almost half of those surveyed expected an improvement in their personal wealth in 2013 compared with 2012. More than 40 percent of people plan to change their car within the next two years, 92 percent own their own homes and half of those said they planned to upgrade to a newer flat in the near term.

Companies that should benefit, according to Sberbank, include Dixy and Magnit; homebuilders Pik and Etalon; Yandex andanother internet firm; mobile providers MTS and Megafon; and banks VTB and Vozrozhdenie.  Carmakers should do well too — Russia is tipped to overtake Germany as Europe’s biggest car market by mid-decade and sales grew last year by 22 percent in value to $77 billion, a recent study from Ernst & Young finds.

So do these stocks justify their valuation premiums? Sberbank’s chief strategist Chris Weafer thinks so. He says consumer-focused companies can expect higher revenue growth in Russia than other emerging markets. Here are some numbers:

Based on an annual median income of $15,000, more than half Russia’s households would be considered middle class, versus a third in Brazil, 21 percent in China and 11 percent in India.

Wealthy households are also more prevalent in Russia, with 15 percent of households having income above $50,000 versus 5 percent in Brazil, 2 percent in China and 1 percent in India. (However, in absolute terms, wealthy Russians are likely to be fewer in number than in the other BRICs due to the country’s smaller population).

All this is good news and not just for Russian retailers, of course. With Russia now a fully-fledged member of the World Trade Organisation, foreign manufacturers of cars to cosmetics can also grab a slice of this market. But for the broader Russian stock market, the reality is less exuberant. Consumer and banking stocks account for less than 30 percent of the index. The rest is made up of energy and commodity companies, many of them state-controlled, and those are the companies trading at heavy discounts.

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