Yet he is also confident enough to add: “We are more positive than we have been for many years about some of the changes we are seeing coming out of Russia and the benefits these could bring to minority shareholders.”
Abuses worse elsewhere
Talking yesterday, Bain explained that the usual reasons – corruption (getting worse not better), human rights abuses (there are other countries with similar abuse records) and an authoritarian government – are not the right reasons not to invest in the country.
“It’s all about the oil price and if you are bearish on oil then don’t invest in Russia,” he emphasised. “The two [Russia’s stock exchange and oil] are highly correlated and oil right now is an unloved sector.”
The Pictet Russian Equities Fund has just over one-third (36%) in energy.
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On the positive side – almost – for Bain other Russian problems such as its budget deficit and poor demographics, often cited as a long-term risk to economic growth, are not major issues. The demographic numbers, for example, show a retirement age of 65, one year beyond male life expectancy.
On the positive side – really – he describes an educated population with 100% literacy; there is no private household debt (i.e. no significant mortgage or credit card market); its labour market is experiencing just 5% unemployment while the productivity of the 95% is still a fraction of developed economies and ripe for improvement.
It also has the largest population (140 million people) and the biggest retail market in Europe to take advantage of the consumer boom that is now under way.
Equity/bond changes for good
In terms of where the money is, investors prefer bonds to equities, with Russia equity funds seeing huge outflows so far this year while their fixed income equivalents are seeing positive flows.
Bain also expects “significant inflows” into the bond markets as they open up to non-resident bondholders, with the percentage increasing from 6.7% at the start of the year to around 15% now.
For “an emerging market that has not evolved in ten years” Bain is still not 100% convincing about the Russian investment case. What he is convinced about though is that market reform is more than just a promise – “It is happening this year” – and, he concludes, greater opportunities will come from the further opening up of the bond markets and continued changes to its equity infrastructure that were kicked off at the end of last year.
