At VTB Capital’s investment forum in Moscow last week, participants shared similar views on the weak outlook for the global economy. But, even against that backdrop, the general message seemed to be that investment opportunities can still be found.
Alexey Zabotkin, Moscow-based head of investment strategy and head of equities research at VTB Capital, said that the global economy is suffering from a protracted deleveraging. “That will mean low growth, low rates and low inflation until the banking system around the world is ready to restart the credit cycle again,” he told FinanceAsia in an interview on the sidelines of the forum. “It will probably take several more years.”
The upside for equities is limited in such an environment, Zabotkin said, while at the same time bond returns are negative and credit spreads are already very tight.
“So, in terms of asset classes, high dividend-paying stocks are the best place to be because that hedges you from the potential inflation risks down the line — and they are paying you better yield than bonds at the moment,” he said.
Russian telecom companies are a good example. They tend to pay dividend yields of around 6% to 7% and face less competition than their global peers, which helps them to maintain sustainable capital structures, he added. Other examples of high dividend yield plays are second-tier oil stocks in Russia, as well as some retail companies in the US and Europe, said Zabotkin.
As President Vladimir Putin pointed out earlier in the week when he addressed the forum, Russia’s recent accession to the WTO after nearly 20 years of negotiations is also of interest to many investors.
Zabotkin described it as a very important structural step that potentially anchors the government’s commitments on measures to improve the investment climate and intellectual property rights, among many other things.
“Of course, greater openness is greater competition, which is a mixed blessing for the corporate sector. But it also means from the macro standpoint, it actually amounts to the more efficient deployment of resources in the economy,” he said. “Productivity gains, at the end of the day, cornerstone a new growth paradigm.”
Zabotkin added that sectors that are likely to face more competition include automobiles and agriculture, while sectors that are dependent on copyright protection will likely benefit most directly from the move.
However, he pointed out that investment in Russia still carries risk, with the biggest sources being government intervention and the inconsistent application of existing policies.
Still, it is clear that investors are increasingly interested in Russia. In 2011, foreign direct investment flows into Russia grew by 22% to reach $53 billion, the third-highest level ever recorded by the UN Conference on Trade and Development.
“The main thing we’ve seen thus far [since I started] has mainly been Asian direct investment into Russian opportunities,” Damian Chunilal, Asia chief executive officer for VTB Capital, said in the Russian capital last week.
The Hong Kong-based Asia CEO was appointed to the position in January this year to oversee the strategic development and further acceleration of the company’s expansion in financial markets across Asia.
“We’ve seen a lot of Asian interest in some of the private equity opportunities that we are marketing in Russia,” he said. “One area that I’d like to highlight is agriculture — we have a lot of experience and capability there.”
Overall, Russian fixed income markets and direct investments are two areas that Asian investors have shown a lot of interest in, as shown by the success of VTB’s perpetual capital issue earlier this year, which saw a lot of Asian demand, Chunilal also said.
VTB Capital is the investment banking arm of VTB Group and the organiser of the annual investment forum.
This year, more than 1,800 guests attended the three-day forum, including more than 400 international and Russian investors, as well as heads of major Russian companies, and representatives from government and key economic ministries.
It will remain to be seen how Russia’s changing investment landscape will further impact investor sentiment towards the country into the future.