New York (HedgeCo.net) – In its Quarterly Review of the Russian Economy, hedge fund Verno Investment Management mapped out some of the forces that suggest that the macroeconomic picture continues to show signs of gradual improvement.
Recent economic numbers indicate that the worst is over, with growth returning, interest rates coming down, commodity prices supportive and inflation falling.
“We expect this recovery to continue and possibly accelerate into the rest of the year.” Dimitri Kryukov, Senior Partner and CIO at the hedge fund said, “GDP at 2.9% confirms that the recession is over and a growth trend has resumed. It also appears that Russia’s long period of double digit inflation has ended.”
The Government’s finances remain in good shape despite higher social spending. The 2009 fiscal deficit was 5.9% of GDP and is expected to narrow this year to 5.4% (running at 2.1% as of 1H10), due to a combination of higher oil prices, a rebound in economic growth and proposed cuts in the number of civil servants. Prime Minister Putin has recently commented that the 2010 fiscal deficit might turn out to be 5% or even lower.
The report examines a number of key sectors in detail including:
Banking – where the banking system has survived the most severe phase of the crisis and moved into a period of relative stability and appears to be on solid footing. In the medium term, Verno believes that the system is capable of expanding its loan book by approximately 15% per annum.
Consumers – while consumers are still feeling the aftermath of the 2009 global credit crisis the CCI began a recovery from Q2 ’09 that led to 5 quarters of steady increases. This leads Verno to believe that the Russian consumer is gradually becoming more optimistic.
Utilities – the sector offers one of the most compelling long-term stories due to structural factors and positive political momentum. The asset base in power generation, transmission and distribution is aging and in imminent need of substantial re-placement. In order for the industry to support anticipated economic growth while operating at an appropriate safety margin, substantial investment in the electric power infra-structure is essential.
Oil & Gas – over the past 12 months, the oil sector has been very volatile with sharp swings in the price of crude, contradictory tax discussions and an uncertain production outlook. While the price of crude is an external factor, taxes and production can be managed. Since oil-related taxes are material for the Russian budget, the trade-off between oil companies and the state is to balance the Ministry of Finance’s drive for higher tax receipts with the companies’ investment needs to develop new oil-fields and increase production.
Metals & Mining – Verno is positive on Steel overall as well as on specific companies which have presence in the US and are exposed to the Russian construction sector. On the flip-side investing in Coal, which has been an attractive theme for 12 months, now seems to have been fully priced in and exhausted.
“Given Russia’s current sovereign debt-to-GDP level of under 12.0%, the Government has room to finance its spending without running into the market-imposed fiscal discipline seen in some European countries. Thus, Russia’s low sovereign debt levels and fiscal flexibility place it in a unique position in the world. Against this the need for caution lies in the recognition that Russia is not immune to the Global Economy.” Kryukov concluded.
Editing by Alex Akesson
For HedgeCo.net
alex@hedgeco.net
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