“Russia is our favourite,” said Nick Timberlake, HSBC's emerging markets chief. "We're being offered a huge opportunity. It is not quite as good as it was after Russia's debt default in 1998, but it's excellent value,” he told The Telegraph. Russia accounts for over 30% of the bank’s BRIC funds, while India has slipped to 20%.
“There has always been a discount on Russian equities because of political risk, but this widened too far," said Edward Conroy, co-head of the bank's Russia Fund. Moscow stocks are trading at a forward price/earnings ratio of 5, compared to Turkey’s 7.2, Poland’s 9.6, China’s 10, and India’s 11.7. “Russia is unloved and undervalued. We think valuations will revert. It is more than just a commodity play,” he said.
Russia’s strong point is its clean balance sheet, with sovereign debt at 11% of GDP and mortgage debt under 4%. This is the trump card in a post-crisis world where sovereign debt comes to the fore.
HSBC is more interested in consumer equities than in energy stocks as rising pensions and other welfare reforms are set to unleash pent-up consumer demand. Among the fund's top picks are Magnit, one of Russia’s leading food retailers, and meat processor Cherkizovo. Meat consumption in Russia currently stands at 62 kg per capita, still below Soviet levels of 78, compared to the EU’s 79 and the US’s 117.
Yet critics remain wary of Russian companies. State spending has grown so fast that it now takes $90 oil to keep the budget in balance. The Reserve Fund has shrunk from $100 billion to $30 billion. The population will contract from 142m to 127m by 2050, the US Population Bureau predicts.
India is the polar opposite. According to Sanjiv Duggal, head of HSBC's India Fund, the country’s per capita income hit $3,000 a year. “The next ten years will take India to where China is today. It is a decade behind,” he said. At the same time, he noted that India’s real estate market remains seriously undervalued.
China scores badly in the BRIC beauty contest, though its potential is very high. There are 400 cars per thousand in the West, and 28 per thousand in China. Yet, China already has 450,000 dollar millionaires, and Chinese have bought more Mercedes this year than Americans.
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