With Russia being highlighted negatively across the World’s press recently, all the positive implications deriving from hosting the world’s biggest sporting event- the 2018 FIFA World Cup - this June and July, have not been in focus.
Russia was unsettled in April by a series of new US sanctions, but as these only target a small number of specific individuals and controlled companies, we see no reason why they should impact the ongoing strengthening and diversification of the country’s economy.
We think Russia will benefit substantially from the World Cup, with the competition giving the country a unique opportunity to bolster its global reputation and strengthen its long-term investment drivers.
The economic benefits of hosting the World Cup will be immediately noticeable to Russia. Previous hosts have reported a short-term economic boost, with Japan and South Korea making $9 billion from the tournament in 2002, Germany making $12 billion in 2006, and South Africa making $5 billion in 2010.
Russia expects this trend to continue, with deputy prime minister Arkady Dvorkovich recently claiming the tournament will bring in up to $30 billion - far more than the $11 billion it has reportedly spent on hosting. Dvorkovich claims it has already added around 1% to annual GDP over the past five years.
According to the Central Bank of Russia, the tournament could add 0.2% to the country’s annual GDP in Q2 and Q3 and may even push inflation down to a record-low of around 2% in the current quarter. With Russia’s economy returning to growth of 1.5% last year after a near-3% contraction between 2015-16 due to weak oil prices, any extra cash would be likely to extend this strong run further. Indeed, independent research firm Capital Economics has even predicted that Russian GDP growth will extend further to 2.5% in 2018.
Beyond this immediate economic lift, we think the tournament will also highlight Russia’s decreasing dependence on oil and gas companies. Although oil and gas firms still make up 47.7% of Russia’s RTS index, demographics are steadily changing. Technology and Agriculture firms are experiencing exponential growth and international investment, while consumer firms are benefitting from lower inflation and falling rates and now account for c.6.5% of the RTS. These sectors have been long-term drivers of Russia’s economic growth.
Indeed, Russia’s largest food retailer, Magnit, is the eighth largest stock in the RTS and has over 140,000 employees, with its shares yielding over 6%.
With more than 1.5 million foreign tourists expected to visit Russia during 2018 FIFA World Cup, Russia’s central bank has forecast a long-term boost in tourism, with the Winter Olympics in Sochi being a proven example, which is now a year-round tourist hub. In turn, this is expected to increase demand for consumer products and services companies, helping to speed up the diversification of Russia’s increasingly diversified economy.
Although bond markets have acknowledged Russia’s progress, with rating agencies S&P and Fitch both upgrading it from junk to investment grade status, perceptions in the equity market remain outdated. The RTS still looks cheap, with a P/E ratio of 7.7x, compared to the MSCI Emerging Market index’s 16.5x. This comes despite Russian stocks yielding a robust average of 5% with pay-out ratios set to continue to increase from 39% to 50%.
We believe the status and prestige associated with hosting the World Cup could give Russia an opportunity to improve its international perception and remove some of the stigma attached among foreign investors. When it comes to capturing global interest, the World Cup is genuinely unparalleled - 3.2 billion people tuned in globally to watch the 2014 World Cup in Brazil. This year’s World Cup looks set to be no different, with two million tickets having already being sold and billions of people set to watch the 32 countries taking part.
This is Russia’s opportunity to project a positive image and get the world to look past its political controversies and fraught international relations, which will almost certainly have a positive long-term effect on foreign investment. With this in mind, the World Cup could provide a particularly opportune time to raise the profile of investing in Russia, and for investors to take advantage of its growing economy while its equity market remains cheap.
The investment case
Russia’s Central Bank’s gradual approach to monetary easing means macroeconomic indicators in the country remain very strong and, whilst volatility is likely over the short term, the long-term prospects remain strong. Crucially, recent years have also seen Russia increase availability to foreign investors by stepping up corporate governance and improving shareholder value.
In 2014, the ruble became a floating rate currency, and last April saw Russia’s government demand state-owned companies pay out half of their profit in dividends.
Russia remains predominantly a resource-driven equity market, accounting for around 20% of global crude oil and gas exports. Accordingly, the country is a primary beneficiary of strengthening commodity prices.
However, Russia’s changing demographics ensure it is no mere proxy for investing in oil and gas. Consumer firms are benefitting from lower inflation and falling interest rates and now account for c.6.5% of the RTS. These firms will receive a further boost later this year when Russia hosts the World Cup.
The real boon is that Russia still looks cheap.
Elio Manca is managing director of ITI.