Where to Invest in Russia as Medvedev Takes Control
Strong domestic consumption, booming demand for commodities and a developing infrastructure continue to provide the catalysts for solid returns on investment in Russia, even after Dmitry Medvedev swept to power as the country’s new president, analysts told CNBC.com.
Investors should play domestic consumption by buying mobile telecommunication companies and selected banks, Jacqueline Aldhous, head of research at Forsyth Partners, said.
MST and Vimpelcom are good telecom picks, while in the banking sector Sberbank and Austrian bank Raiffeisen, which has branches in Russia, fit the bill and look set to gain, Aldhous added.
Russia is also a very under-penetrated mortgage market, so demand for loans, financial assets and asset management services is booming, Dr. Ghadir Abu Leil-Cooper, head of EMEA equities at Baring Asset Management, said.
The Russian credit card market also appears underdeveloped in comparison to Eastern Europe.
"The big banks don’t need external financing so you can have exposure to an economy that’s growing very fast," Leil-Cooper said.
But "liquidity conditions in Russia are deteriorating," Martin Majdaniuk, investment manager from Baring Asset Management, told “Squawk Box Europe” Monday.
Investors could also benefit from deal activity in then banking sector. France's Societe Generale added to its controlling stake in Rosbank Tuesday. Societe Generale is expected to make a mandatory offer for full control to the bank’s shareholders soon.
Investing in Infrastructure
Russian steel companies are benefiting from increased demand from the Middle East and China, while being sheltered from rising raw material costs, Leil-Cooper told CNBC.com.
"If you still have strong demand because of infrastructure spending, as well as (having) access to the raw materials such as iron ore, you have another strong investment case” Leil-Cooper said.
Russia’s government is boosting demand for raw building materials by improving roads and buildings.
"Russia has had years of under-investment under the Soviet area … this time round the government was extremely prudent," Leil-Cooper said.
Medvedev’s ability to contain inflation will be a key issue for Russian companies, as rising wage demands look set to dent profits, economists said. But high commodity prices make companies in the sector positioned to withstand the pressure.
“Iron ore producers (and) steel producers are clearly the companies which will manage to deal with high labor costs, high domestic electricity power prices,” Majdaniuk said.
Counting on Commodities
Russian gas giant Gazprom still provides attractive investment opportunities, adding that it currently has the world largest gas reserves, according to Leil-Cooper.
Gazprom shares are up more than 34 percent since the start of 2006.
Gas plays are a better investment than oil, according to Aldhous, because gas prices are likely to gradually rise.
A lesser known commodity that investors can gain exposure to by investing in Russian companies is potash, a glass-type substance used in fertilizers, Leil-Cooper said.
"There aren’t very many companies that can produce potash … and Russia has a unique resource base," she said.
Uralkaly is Russia’s biggest producer of potassium fertilizers and the fourth-largest in the world.
What to Avoid
Retail companies and more direct consumer plays are best avoided in Russia, Aldhous said, largely on valuation grounds.
"They are pricing in perfection and heroic assumptions for growth and earnings."
Investors hesitant to move into Russia stocks could look to funds that specialize in the region.
Baring Russia Fund, JPM Russian Securities, The East Capital Russian Fund and Clariden Leu (GUE) Russia Equities all specialize in Russian exposure.