Private credit might be less attractive than it was last year as investors rush into the market, but there are sweet spots to be found.
A sudden excess supply of equities, stagnating market performance, plus uncertainties in an election year are to blame, according to Douglas Helfer, fund manager for Russian equity at HSBC Global Asset Management, who is in Hong Kong this week to launch HSBCÆs latest single country offering û the HSBC GIF Russian equity fund.
This year, as Bric markets have dipped into financial trouble, Russia might once again become a compelling case for emerging market investments, Helfer says. With a price-to-earnings ratio of 9.2 times, RussiaÆs market is now trading at the lowest valuations among all global emerging markets.
Few other markets have made it close to RussiaÆs level û with Korea at 11.5 times, Thailand at 12.1 times or even Malaysia at 13.2 times. Yet RussiaÆs low P/E ratio is coupled with some of the most profitable corporates in ôall of the emerging market universeö, and with a return-on-equity of close to 20%, it is more attractively priced that China, India or Chile, according to Helfer.
With a new president, Dmitry Medvedev, and his predecessor Vladimir Putin staying on as prime minister, the question of political stability has been answered, Helfer says, and "that risk is now behind us".
The new government's "objective is to return Russia into an economic superpower û and to do that well, they need to continue to grow. So growth is the key operative,ö he says.
In fact, RussiaÆs GDP growth in real terms has accelerated and taken over Brazil, China and India this year. Other pluses working in Russia's favour are: robust current and fiscal accounts; the lowest level of unemployment in a decade; and steadily rising domestic consumption and investments, which have gradually overtaken the export sector as the largest contributor to RussiaÆs GDP.
Even if oil prices dip below $80 per barrel, which is a highly unlikely scenario for the medium term, RussiaÆs fiscal account will be in no risk of a budget deficit, says Helfer.
Furthermore, he points to the underlying transformation in RussiaÆs equity make-up. Investing in Russia is no longer a pure oil story. As of end-2007, the energy sector made up just 57% of MSCI Russia, compared with 75% in 2003.
More sectors are coming into the market, making it an increasingly diversified story, as liquidity increasingly improves. ôIn the past, daily turnover used to be between $100 million and $150 million a day. Today, daily trading starts at between $3 billion and $5 billion minimum,ö he says.
Currently, RussiaÆs high-net-worth population of 119,000 is the largest among emerging economies, and the fourth fastest growing at 15% per annum after Singapore at 21.2%, India 20.5% and Indonesia 16%. With private consumption growth forecast at 13%, it exceeds even the projection for China at 10%.
Helfer favours sectors with high exposure to consumption growth, including financials, consumers, telecoms, property and steel. His portfolio consists of a concentrated basket of 20 to 40 stocks, with core holdings in large corporations, liquid blue-chips, and one-third allocation to mid-cap companies.
Helfer began his career in the US Embassy in Moscow in 1988. Prior to joining Halbis in the UK in January 2006, Helfer was a fund manager at F&C Emerging Markets overseeing Eastern European, African and Russian investments.
Helfer has a BA in Soviet and Eastern European Studies from the University of Colorado, an MA in Russian Studies from the University of London, and an MBA in Finance from City University Business School. He speaks fluent Russian.
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