Russia’s new « growth government »
Since we started managing assets on the Russian market in 1994, the Russian investment opportunity has shined in different facets. From deep value in the 1990s to high growth in the 2000s it has since turned into a value opportunity again, with the Russian stock market surprising investors with surging dividend payments and today’s outstanding average dividend yield in excess of 7%. Economic growth, on the contrary, has been quite tepid, as over the past five years, the government has been favoring macro stability over growth stimulation. Strictly committed to the so-called ‘fiscal rule’ it has stockpiled FX reserves up to a level close to their historical record of $575bn, well above the overall external debt of the country. The priority was to tame inflation (down to 2.4% in January this year), allowing a sharp reduction of borrowing costs, and to deleverage the economy. In 2019 as in previous years, the Russian federal budget displayed a surplus, amounting to RUB 2.0 tln (€ 28bn) or 1.8% of GDP.
We believe things are about to change, and that now that macro stability has been achieved, the Russian state is willing to relax its fiscal stance by easing the fiscal rule and using its ammunitions. On top of the current $560bn of FX reserves, we assume that while oil prices remain above $50 /bbl the Russian state can use extra fuel revenues, as shown on Fig.1.
Fig.1 - The fiscal rule can be relaxed
Last month, the “stability” government of Dmitri Medvedev left place to a reshuffled government immediately labeled as a “growth” government, headed by a new Prime Minister - Mikhail Mishustin. This new government has already committed to spend RUB 4 tln (€ 57bn) in 2020-24 to support consumption via additional social measures for families with children. This amounts to an annual stimulus of 1.3% of total household consumption and 0.35% of GDP.
We think these initiatives, coupled with other tailwinds such as the lower inflation and borrowing costs, will very much support consumer and real estate stocks.
We view residential real estate developers among the key beneficiaries of rapidly falling interest rates in Russia, as this further stimulates the development of the mortgage market, a key sales driver. Mortgage rates hit a record low of 9% in December and, as the CBR continues to cut its repo rate (to 6.0% now), we will see mortgage cheaper than 8%, as mentioned by PM Mishustin, in the coming month. With the mortgage/GDP ratio at 7%, vs 21% median ratio in emerging markets (IMF data), there is still significant potential for further mortgage growth in Russia. Another stimulus for the housing market is households transferring cash from low yielding saving accounts (now less than 6% in roubles) into higher yielding investments, which include real estate. Housing is particularly appealing to families with children that receive financial support from the state. Real estate builders LSR Group and Etalon are our favorite stocks to play this opportunity. Both offer a good combination of growth and value, paying around 10% dividend yield and valued on 2020E P/E around 6.0x.
Another likely beneficiary of the state subsidy program for families and children is child retailer Detsky Mir, combining double digit revenue growth (17% yoy on 9M19) and 9% dividend yield (paid on FY18 earnings). It trades on a 2020E P/E of 10x.