Consumers to power Russian economy, stock market-study

Tue Feb 5, 2013 10:27am EST

* Russia to be Europe's largest consumer market by 2020

* Middle class is 55 pct of population, higher than other BRICs

* Consumer-oriented stocks tipped to outperform

By Jason Bush

MOSCOW, Feb 5 (Reuters) - Russia's consumer market will be the largest in Europe by 2020 and the fourth largest in the world, offering rich pickings for investors, according to a report on Tuesday by Sberbank CIB, the investment banking arm of Russia's top bank Sberbank.

The report sought to counter popular stereotypes that Russia's economy is largely based on oil and other natural resources and highlight the growth potential of consumer-oriented sectors that cater to a large and growing middle class.

"We are attacking the myth that Russia is a basic raw materials market. Russia's economy and GDP are driven primarily by consumption," said Andy Smith, head of equity research at Sberbank CIB, presenting the report.

Consumer-oriented sectors already account for two-thirds of Russia's GDP and have contributed 80 percent of Russia's economic growth since 2004. Consumer spending could almost double to $3 trillion by 2025, the report forecast.

The middle class, with annual income of $6,000-$15,000, accounts for 55 percent of the population, the report said, a far higher proportion than the other "BRIC" economies of Brazil (30 percent), China (21) and India (11).

Russia also has a far higher share of high earners, with 15 percent of households boasting an annual income above $50,000 - three times more than in Brazil.

As the spending habits of the Russian middle class converge with those of peers in developed economies, this will drive the growth of underdeveloped products and services, the report said.

For example, between 2013 and 2015 demand for premium tourism, internet retail, private savings plans, consumer loans and video games are all projected to grow by 10-15 percent per annum.

The fashion and footwear market is expected to grow by 5-10 percent, with the advertising and media market sectors forecast to see 8-10 percent growth.

The report projects Russia's overall economic growth at 4 percent over the next five years, still some four times faster than in the economically-troubled Eurozone.

BUYING OPPORTUNITY?

Despite the rapid growth potential of Russia's consumer economy, Sberbank CIB said consumer-focused companies are poorly represented in the stock market, implying that these companies' shares have been neglected by investors and are therefore a buying opportunity.

Such companies account for just one-third of stock market capitalisation, with extractive companies accounting for the remaining two-thirds, even though the latter have limited growth potential.

The weighted average 2013 price-earnings (P/E) ratio for Russian consumer stocks, 7.0, compares with an emerging market average of 11.8 and a world average of 14.4, Sberbank CIB estimated.

The publication of the Sberbank CIB report coincided with the launch of a new equity index, the Sberbank CIB Ivanov Index, that is designed to monitor the performance of 24 Russian consumer-oriented stocks and provide a benchmark for investors.

"We see a very profitable trade in the years ahead by expressing and aligning Russian stock selection with the country's mega-theme of domestic consumption," the report said. (Reporting by Jason Bush; Editing by David Cowell)

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