HSBC overweights Russia

29 July 2010 | By Cherry Reynard

HSBC, one of Europe’s largest managers of emerging market equities, points out overall valuations on the Russian market are now at a 40% discount to the wider Global Emerging Market universe. Typically they have traded at a 20-25% discount.

Fund houses such as GLG Partners and Armstrong Investment Managers have kept their Russia weightings low, citing poor corporate governance as justification for low valuations.

However, HSBC has seen a broad range of opportunities in the country, beyond its massive natural resources sector.

It is optimistic on expansion in the Russian retail sector as wage expansion fuels a boom. The group says that food retailing is estimated to grow at 20% per annum in 2010 and is exposed to this through stocks such as Cherkizovo Group, a pork and poultry producer.

India is the group’s largest underweight, but manager Sanjiv Duggal believes the country could hit an inflection point if GDP rises to $3,000 per capita, saying China saw a rapid increase in growth at that level. HSBC is getting exposure to this growth through the real estate sector, which is relatively embyonic and under-owned in India. (article continues below)

China’s consumption growth has been well-flagged and Nick Timberlake, manager of the HSBC GIF Bric Equity fund, admits that there have been bubbles in the region, notably in real estate. However, he says the consumer in the region is still likely to grow. Chinese car sales outstripped those of America last year and penetration is still only 28 per 1,000, compared to levels of 400 per 1,000 across Europe and America.

HSBC says growth in domestic consumption is imperative if emerging markets are to maintain their growth momentum.

Public sector spending is only a short-term solution, according to the group. Although emerging markets are at different stages in their development, they all need to make the transition to generate more demand domestically.