Risk and Recovery in Russia

Russia has a lot of upside, and a big part of why is the risk trade.

Russia was one of the top emerging markets in July, rising 10.3 percent as risk tolerance came back into the market.

And we think this upward trend can continue – Russia has a lot of catch-up potential. Its stock market remains 51 percent down from its May 2008 peak despite a 143 percent rally from its bottom in January 2009, according to Credit Suisse.

While the other BRICs have taken measures to keep their economies from overheating, Russia is just starting to benefit from stimulus implemented during the crisis.

Rising consumer demand accelerated GDP growth to 5.4 percent during the second quarter, and we think the consumer story is just getting started. Money supply is growing at a historically high rate of 30 percent, which should grease the economic engines for further expansion during the back half of the year.

U.S. dollar strength had been a headwind for Russian markets but that appears to have reversed. We’ve also seen a turnaround in the banking sector, which has historically been a positive for emerging markets.

The Russia story is just catching on. Capital inflows have been slightly positive so far in 2010, but still lagging the 2006-07 period, when monthly inflows exceeding $150 million were not uncommon.

Despite the promising outlook, some potential hurdles remain. For instance, to raise capital, Moscow is selling $35 billion of its equity in Russian companies between 2011 and 2013. This large amount of shares could pressure equity markets until this overhang is removed.