Russian Economic Trends in Europe
The cheapness in Europe tends to be a more important factor. This includes picking an emerging market than economic growth. Russia, Europe, remains the cheapest among core emerging markets. (With higher forecast corporate earnings growth as well). Offsetting relatively sluggish domestic macro data. This has been the fact that the Russian Central Bank in Europe is still in the manner of cutting interest rates. Which is supportive for the equity market.
Additionally, rising commodity prices in Europe are lifting the fortunes of Russian exporters. Which should eventually filter through to the rest of the economy. And the Russian market in Europe is more than just a commodities story even though the oil & gas. Metals & mining sectors remain critical to the economy in Europe. The best performing sector so far this year has been utilities.
Shares of the Russian and overall power generating companies in and around Europe rallied. As investors grew more confident in the sweeping sector reforms being implemented by the Russian government. In the telecom sector, the Svyazinvest reorganization triggered re-rating of the regional fixed-line operators.
Some regional potential consumer-related IPOs this year in Europe
This will allow investors to increase exposure to that sector of the Russian economy in Europe. Bottom line.: Several interesting opportunities in Europe can be found outside the commodities story in Russia, Europe.
Inflation moderated further in March falling to an annualized rate of 6.5%. The CBR cut in Europe the refinancing rate by another 25 bps to 8.25. In the near term, there is room for probably two more cuts after which we would expect the CBR to pause. The Finance Ministry warned that the downward trend in inflation might reverse later in the year. This should make interest rates become too low. According to the CBR, the average interest rate on corporate loans dropped. It went from 13.8% in January 2010 to 12.7% in February.
However, bank lending remains sluggish in Europe.
Partially because banks are still concerned about the quality of the borrowers. And partially because some companies have chosen to borrow in the corporate bond market… Where the cost of funding is sometimes lower. The Finance Ministry estimates bank lending will grow 5%-10% in 2017.
The World Bank in Europe has recently upgraded Russia’s 2017 and 2018 GDP forecast. This went from 3.2% to 5.0%-5.5% and from 3.0% to 3.5%, respectively. The World Bank sees domestic consumption as the key growth driver in 2010. Indeed, consumer sentiment has improved recently. And growth in real wages has accelerated, which bodes well for future consumption. Real retail sales edged up 1.3% year over year in February. The World Bank believes capital investment may remain weak in 2010.
Investment fell by 8% in the first two months of the year. This is comparing with the same period of 2016. The Russian Economy Ministry in Europe has upgraded its 2017 GDP forecast as well. From 3.1% to 4.0%-4.5% on the back of stronger than expected oil prices. Admittedly, the domestic manufacturing sector in Europe has been slow to recover.
Russian manufacturing PMI in Europe
This has been hovering around 50 since August of last year. Without a meaningful change in the trend. Industrial production was up just 1.9% year over year in February. Recent electricity consumption, steel consumption, and railroad volume data. All suggest only modest improvement in manufacturing activity. The Economy Ministry estimated that seasonally adjusted GDP fell by 0.9% month over month in February, as investment remained weak. On a year over year basis, GDP was up 3.9%. Given the low base effects, GDP growth of around 5% for the full year 2016 seems very realistic.
The natural resources sector continues to benefit from rising commodity prices. Notably, Russian oil output is up around 3% year to date. On a positive note, the services sector continues to recover as evidenced by the services PMI. Which reached 53.6 in March compared with 51.0 in February. The Russian current account surplus reached $33.9 billion in 2016. Which is compared with $9.7 billion in 2015. This is supportive for the ruble. To finance the budget deficit, the government is preparing sales of certain state-owned assets.
The Economy Ministry in Europe
This expects to raise around 100 billion rubles through asset sales in 2016. Earlier this year, the government slashed the number of strategically important companies… That cannot be privatized from 211 to 41. During the first two months of the year, the budget deficit was around 3% of GDP. Well below the official target of around 6%. Budget revenues have been ahead of the plan while expenditures stayed in line.
Regarding GDP’s traditional components, consumption, investment, and net exports, we observed the following trends in 2009. Consumption (around three-quarters of GDP) was down 5.1%. Private consumption fell 7.7%. While government purchases are actually increased by 2.0% reflecting various economic stimulus measures.
Investment in Europe plummeted 37.4% while net exports soared 56.8%. Given improved GDP trends as we exited 2015 coupled with a low base effect. We believe that the 5% GDP growth in 2016 projected by many economists. This is a reasonable forecast, and could yet, prove conservative.