Is Russia the ideal recovery play?

Does a higher oil price, a stabilising financial system, burgeoning domestic demand and a resurgence in India and China mean it is time for investors to increase their allocation towards Russia to exploit global economic recovery?

F&C Emerging Equities manager Gareth Morgan certainly believes so. He sees Russia as an ideal recovery play and expects the Russian market to outperform against an improving macroeconomic backdrop.

Morgan said: 'Russia is a useful beta play on the global economy. For investors who believe that a sustainable recovery is on the way, this potentially dynamic market is a proposition worthy of close consideration.'

He added: 'Dominated by its vast commodities sector, the Russian market is highly geared to global demand. And the resurgence of India and China, as well as the return of growth to near neighbours Germany and France, should help to significantly boost export revenues. In a climate of improving risk appetite, Russia can therefore be expected to outperform.'

Morgan is also encouraged by a more bullish outlook from consumer-related companies, particularly mobile telecoms operators. 'The consumer sector will, in turn, be supported by the government's budget next year, which will have more of an emphasis on social spending,' he said. 

The emerging markets specialist is, however, mindful of the country's fragile banking system and domestic industrial production.

But not everyone supports Morgan's bullish prognosis.

Thomas Becket, head of global investment strategy at PSigma Investment Management, is unconvinced that Russia represents the best recovery play at the moment, as is demonstrated by his zero exposure to the country.

Becket said: 'We are going to have a recovery, but the question is how strong and sustainable it will be. The important thing for Russia is the oil price, as the Russian market stabilised when the oil price bottomed and it was the same for the rouble. There is the argument that Russia is a long-term consumption-driven recovery story, but this is not the case at the moment.'

He added: 'Russia is dependent on commodities prices staying high, particularly for oil and gas, and what we have seen is that Russia was hit as the oil price came off. There was also far too much leverage in the Russian economy, predominantly in the private sector which was hit as the oil price fell, and credit was just not available there late last year and early this year.'