Russia's consumers have money to spend

Fund management chief Michael Hanson-Lawson describes the enormous potential in Russia's retail sector.

The "allure of the Russian consumer" cannot be underestimated, stresses Michael Hanson-Lawson, chief executive officer of East Capital Asia, the Asian arm of Sweden-based fund management firm East Capital.

"Consumption makes up 63% of Russian GDP, which is the same proportion as in Brazil," he said at the AsianInvestor/FinanceAsia Russia Capital Raising and Investment Summit at the Four Seasons Hotel in Hong Kong this week.  

Hanson-Lawson traced the recent history of the Russian shopper, whose spending power lies in its high relative level of disposable income. Housing was privatised in 1991-1992 and given away free to residents -- so there are no mortgage payments to sap their bank balances. They were already unencumbered by debt during the Soviet years when transactions were invariably settled with cash, not credit. Also, most household utilities are still heavily subsidised, and the country's basic income tax rate is only 13%.

"Russian total household debt is among the lowest in the world," said Hanson-Lawson. Average individual debt of $840 is slightly higher than the one-month average wage -- a tiny figure.

Equally important, Russia's GDP is expected to grow rapidly, exceeding India's and reaching parity with Brazil's by 2014, according to the IMF. Even more startling, GDP per head should be 10 times India's, 2.5 times China's and 50% more than Brazil's by that date. Large parts of Russia's population is simply becoming more affluent, enriched by wages that have risen six-and-a-half times during the past decade.

Meanwhile, Putin's presidential and prime ministerial years have ushered in a period of confidence, after the uncertainty and instability of Yeltsin's leadership. Money is staying at home rather than pouring into London or Cyprus.

Between 2001 and 2008, retail sales grew at an average of 25% year-on-year, then plunged in the first half of 2009, but have subsequently recovered this year, buoyed by a government stimulus package worth 15% of GDP. Old folks also received an injection into their spending arms with a 30% increase in pensions last year.

Banks are more willing to lend for retail spending, and are well provisioned for any loans turning sour, which, so far, have been few in number, said Hanson-Lawson. Borrowing rates are high, however; as much as 29% for unsecured loans and 19% for secured lending. But, with inflation falling, interest rates are set to drop. Nevertheless, the banking arena needs to be more competitive, but then credit data collection and assessment also needs to move from the primeval stage.

The retail market is fragmented and still dominated by street kiosks and open-air markets, but chain stores and hyper- and supermarkets are springing up rapidly. Many of them are concentrated in the rich cities of Moscow and St Petersburg, but there are 11 cities with populations of more than one million that are ripe for penetration. Foreigners can own 100% of businesses in non-strategic sectors, and can even own the land their premises are built on.

The retail sector remains dominated by food, which makes up 50%-55% of the market. Curiously, DIY stores are next, with a 5% market share. According to Hanson-Lawson, the leading investible retailers are the food sellers: X 5 Retail Group, Magnit, Dixy and Seventh Continent; and the electronics distributor M-Video.

Hanson-Lawson advised investors to put together a diversified portfolio of consumer stocks to ride the retail spending wave. These include beverages, juice producers, mobile phones, banks, property and utilities. A portfolio weighted this way over the past decade would have produced even better returns than one weighted towards exporters, he claimed.

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