Rising wages in Russia should give companies focused on the domestic market a shot in the arm.
That’s according to Citywire AA-rated Erdinç Benli (pictured), manager of the JB EF Eastern Europe Focus fund, who anticipates earnings growth for domestic stocks of around 18% next year. Benli currently has 54.2% of his Eastern Europe Focus fund devoted to Russia, which is his largest country allocation.
Expectations of an increase in state wages and pensions come ahead of 2018’s presidential elections, GAM’s investment director for emerging market equities says.
‘In the upcoming election it is possible the government may give pensioners and state employees, who had their wages frozen, additional pay. So the income of the consumer is improving, and that is why I think it is interesting to look at domestic names in Russia,’ Benli says.
Higher oil prices and prudent monetary policy will also buoy the sector, Benli says.
‘Expectations are that oil prices are going to go up. If you look at the median expectations of analysts, they expect $55 per barrel next year. That should support the rouble, which could strengthen. That in turn helps inflation, which was high at the beginning of the year.’
As well as stocks exposed to rising Russian consumer spending, Benli points to financials as a promising play on monetary policy in the country.
Financials is currently the largest sector allocation in the fund at 26.4%, and Moscow-based bank Sberbank is the second largest holding in the fund at 6.12%.
‘The central bank has the capacity to lower rates,’ he says, ‘and has further room to lower next year. This will support loan growth, consumers and financing costs. That is why financials are doing extremely well.’
Other growth areas in the Russian economy Benli is backing include transport companies and internet businesses. He has a small holding in Russian search engine Yandex, which he says holds promise despite a recent security breach.
‘With the improving economy, this momentum will continue. Cybersecurity is a major topic all over the world and not just in Russia. Russians are quite good in the IT space.’