Russia is witnessing the rapid growth of the consumer, with an expanding middle class and boosted spending power. It is a great time to be an investor in emerging markets.
The emerging Russian middle class is the engine behind the surging economy, quite independently of the boom in commodities prices. Much is heard of the Russian’super-rich’, but wealth has percolated through the Russian economy in exciting ways.
Typically, Russia is seen as an energy play. In 2005 the energy sector was certainly behind the stellar performance of the Neptune Russia & Greater Russia Fund. However, there was a significant shift in 2006 from a resource-driven economy to a consumer-driven economy.
A recent Goldman Sachs study reported that, over the next 20 years a middle class of more than 800 million people will develop across Brazil, Russia, India and China – larger numerically than the current combined populations of the USA, Europe and Japan. World dynamics are changing, and Russia plays a key role in that as a resource-rich, well-educated population with a strongly-motivated workforce.
Russia has used high oil prices to impose a windfall tax, creating in turn a stabilisation fund of more than $140 billion to ensure continued stable growth in the Russian economy, the funds being used to improve infrastructure. The Russians intend to create a domestic IT business using such tactics as enterprise zones and tax-free investment subsidies for people setting up companies of that type. The continued upgrading of Russia’s debt by the international rating agencies such as Moody’s underlines the huge advances this economy has made.
Russia’s financial importance can only increase. It is expected that by 2040 the Russia will have the world’s fifth-largest economy. Politically, we have seen Russia move towards a free market under Gorbachev and accelerate more rapidly under his successor, Boris Yeltsin. The privatisation programme that Yeltsin promoted yielded spectacular riches for a very privileged minority. What has really pushed Russia’s place in the international community has been a post-Yeltsin regime under Vladimir Putin. Russia’s current position in the international community is a direct result of Putin’s free market reforms.
The rise of the Russian consumer has been the most significant development for this market. It broadened the investment opportunities to other key industrial sectors, enabling Russian investors to diversify their portfolios.
Investing in companies in the consumer staples, telecoms and financials sectors can offer access to the rising spending power of Russian consumers. There are many food retailers, banks, mobile phone companies and breweries that represent excellent value, and continue to deliver good performance while being relatively underpriced. However, oil and gas companies should not be ignored. In fact, within the global energy sector, we believe they offer particularly good value.
I have been investing in Russia for more than 15 years, and continue to visit the country at least three times a year. The Neptune Russia & Greater Russia Fund is the first UK onshore Oeic investing purely in Russian equities. It is designed to be a concentrated, but diversified, portfolio holding blue chip, large and liquid stocks. The Fund has delivered over 215 per cent performance since its inception nearly three years ago, ranking it top of its sector over that period. It was the top performing fund across the entire IMA universe of more than 2,000 funds in 2006.
Russian classes
The Adviser Fund Index (AFI) is made up of the recommended portfolios of a panel of leading UK financial advisers and is based entirely on the funds those firms have actually recommended to clients.
The three AFI indices, aggressive, balanced and cautious, are intended to represent an ideal portfolio of funds for an individual in his 20s, 40s and 50s who is saving for a pension age of 65.
Neptune’s Russia & Greater Russia fund was launched on December 31, 2004 and invests mainly in consumer stocks, energy, telecoms and materials.
