Sberbank CIB held a press conference on February 5 to announce something that (without wanting to be facetious) everyone knew already: Russian consumer stocks have not only outperformed the rest of the market, but have outperformed all emerging market indices for most of the last decade.
The difference is that the guys at Sberbank have done their homework - a lot of homework - and put some real meat on the conceptual bones of investing into the Russian consumer story.
Plus they have set up an index based on the 24 best names with major exposure to the 'consumerÓ story that is now listed on Bloomberg under the ticker 'IvanovCIBÓ so fund managers can measure just how well this story is doing.
'The Russian story is not one about oil, gas and metals, but it is a consumer story,Ó says Andy Smith, Sberbank's head of research. 'The consumer companies have been outperforming yet two thirds of the companies listed on the exchange are raw materials producers.Ó
That is why I put quotes around the word consumer as the not enough companies directly catering to the consumer like supermarkets on the exchange to set up an index that is a pure consumer play. Instead the index includes some names that benefit from the growth of consumer demand with two degrees of separation like fertilizer company Uralkali, which is growing because agriculture is growing, which is growing because people are buying food. Likewise, financial services are usually classed as 'financial servicesÓ but in this case are lumped into the consumer bracket. Indeed there are even a few names on in there that are not Russian at all, like Ukraine's chicken farmer MHP.
Still, lets not quibble as the basic idea is solid. Russia's emerging middle class has already emerged quiet a long way and now accounts for 55% of the population (defined as Russians with an income of between $6,000 and $15,000 a month). Their spending has taken over from oil and gas as the main economic driver.
One of the more controversial claims Sberbank is making is that the increase in per capita GDP will not slow down. Currently it is clearly the fastest growing of all the BRICs, but Smith says that Russia will go from 45th in the world in terms of per capita GDP to 4th or 5th by 2050. Although countries like China and India are growing faster Russia's demographics works to its advantage on this score and will concentrate the wealth in few hands pushing up the overall number in the next decades - which in turn will drive the consumer sector only faster.
Here the research kicks in as Smith showed that oil and gas have continued materially little to Russia's super-strong growth pre-crisis, with almost all the gains coming from retail and services since about 2000. Oil obviously does play a role as it accounts for two thirds of exports and a bit less than half of the government's tax revenue. 'Its the fuel,Ó says Smith. 'But the producers, retailers and processors are the engine of this growth.Ó
The index is investable and will be updated and rebalanced bi-monthly based on the bank's on-going consumer research and survey with partner Euromonitor.
The report titled 'Consumer Speed Kings: Team Russia Leads the WorldÓ (that includes a cartoon on the cover - the trademark image of Troika Dialog, which was merged into Sberbank last year), compares Russia with other emerging markets, including Brazil, India, China, South Africa and Turkey, as well as the Eurozone and the US. It combines a top-down domestic consumption growth mega-theme analysis with a bottom-up assessment of individual equity investment opportunities to play on the theme that have gone into the index.
'Domestic consumption (not the extractive industries) has delivered 80% of Russia's economic growth since 2004: the consumer-linked industries have driven almost all of this growth,Ó the report says. 'Russia is set to become the biggest consumer market in Europe and the world's fourth largest by 2020; Russia's annual total consumer sector activity may climb to $3 trillion by 2025,Ó up from $670bn in 2012.
'All of Russia's retail companies are hugely undervalued,Ó Smith told bne. 'Even [supermarket chain] Magnit, if you compare it with its peers in the west. There companies are expensive but they are priced fro growth that they are clearly not going to achieve. CEOs at multinationals will be forced to look at Russia which is growing at above trend, yet the valuations are still very cheap.Ó
As bne consistently for several years now, Russia comes out very favourably from most BRIC comparisons and already has by far the biggest proportion of middle class among the BRIC countries with a GDP per capita that will take more than 10 years for Brazil, India and China to catch-up with, according to Smith.
Indeed, while many observers believe that many of the retail companies are reaching maturity, Sberbank's research suggest that actually, 'the Russian consumer market is still early-cycle relative to the other BRIC economies and continues to benefit from pricing resilience and low levels of penetration.Ó
For example, while Magnit trades at a price to earnings multiple of around 30, which is extremely high for a Russian company, it still commands less than 10% of the market and is planning to roll out 1,000 new stories this year alone. That's Smith's point: the multiple is meaningless as in the next few years the size of companies like Magnit and its cousins is going to increase by orders of magnitude and valuations between then and now will make little sense.
On the flip side, even the current valuations are depressed, thanks to Russia's poor investment image and perceived 'oil risk imageÓ.
'Russia's implied equity risk premium is trading at a near 10y high,Ó says Smith and Russian the equity market has missed out in the recent return of funds to the emerging markets as normalcy slowly reasserts itself. 'The aggregate Russian consumer sector is trading at a 25-50% valuation discount versus Brazil, India, China, Turkey and South Africa, while expanding its aggregate earnings materially faster. We forecast Russia's listed retail sector revenues will grow by circa 23% in 2013.Ó
This growth should attract more investment and feed an expansion of mergers and acquisitions. Sberbank expects mergers and strategic alliances across the wider Russian consumer-sectors to pick up and list the most like candidates in their report.
But perhaps the most useful part of the index and its associated research will be the surveys done to predict where the retail trends are headed. The inaugural survey threw up some interesting indicators.
• While 2012 was challenging in terms of personal income and concerns over the direction of the Russian economy, most consumers are now more optimistic and expect an improvement in their personal situation in 2013.
• But, while optimistic, the majority is still not yet confident enough to make major purchases. Most people are holding back from big-ticket purchases, while waiting for evidence of better economic growth.
• Within the big-ticket category, a surprising 42% of people still plan to change their car within the next two years.
• A majority of people own their existing home (only 11% rent) but approximately half plan to upgrade to a newer home in the near term.
• Customers are increasingly price sensitive: 37% of respondents consider price attractiveness as a key factor in whether, and where, they buy.
• In selecting a supermarket, price and the quality of goods are significantly greater considerations for food shoppers than interior layout or service.
• Inflation and unemployment are key areas of concern for most of the population, although there is healthy optimism: 44% say they expect an improvement in their personal wealth in 2013 compared with 2012.
• Most people see the high level of corruption as one of the main reasons holding back economic development in Russia. They see the fight against corruption as one of the government's key priorities.
• The number of people who say they would be prepared to emigrate, as they consider economic and lifestyle prospects to be better elsewhere, is still extremely high at 38%.
• Stock-specific findings reinforce our positive stance on multiple Russian equities, including Magnit, Dixy Group, Yandex, MegaFon, MTS, LSR Group, Etalon Group, Sollers and Aeroflot.