February 4, 2011
The panel started with a video from the World Economic Forum in Davos, where delegates were asked to rank BRIC countries in terms of investment attractiveness. The vast majority placed Russia at the bottom of the ranking. This video launched a discussion in which the majority of panelists expressed more optimism toward the Russian market. Christopher Granville started the discussion by pointing out that those who propose dropping Russia from BRIC refer to the dramatic GDP decline in 2009, which put the country out of the group of fast-growing economies. However, GDP growth is not a determinant of market performance; investors buy not GDP growth, but corporate profits. ROE is the key for market performance and that is why the Russian market outperformed the rest of BRIC over the last decade.
Mario Garnero spoke about the success story of Brazil, which is now considered one of the most attractive GEMs. He said that the key factor of the country’s success was reducing inflation. Inflation created inequality, wiping out the wealth of the middle class. After inflation went down, the middle class reemerged, creating a stable society and driving the domestic economy higher. Now, according to Garnero, the size of the middle class in Brazil is 52%.
Vladislav Soloviev shared his view on Asian economic growth from the position of a commodity producer. Although China is growing at a rate of 9-10%, aluminum consumption is growing 13-14% annually. The main driver is domestic demand – the automotive industry and infrastructure construction. India has even better consumption growth potential, as it is starting from a lower base. The lack of resources is the main limitation for Chinese growth. For example, electricity prices in China are not only the highest in BRIC, but they are also high compared with developed economies. This makes Russia the key to the growth in Asia. Mr Granville pointed out that this situation makes Russian companies attractive: even though Russia is growing at much slower rates than China, Chinese growth is impossible without Russian resources, so resource producers will have high profits, which should drive the market up.
Marc Faber argued that under both principal scenarios – deflationary collapse and inflationary boom – commodities and hard assets are the best choice. In case of deflation, the US will print money, as there is no future in destroying the value of cash and treasuries and making hard assets the last refuge. Under an inflationary scenario, commodity prices soar due to increased demand.
Aivaras Abromavicius shared his experience of investing in Russia in the last decade. He said that the country has provided the best returns and still remains cheap because corporate profits have done very well. He argued that BRIC is in fact made up of two parts – the low-income economies of China and India, which have fast growth; and the medium-income economies of Russia and Brazil. One should not expect the same growth in Russia and Brazil as in China or India. Mr Abromavicius thinks that the perception of Russia as a place that where it is too difficult to do business emerged because Europeans apply higher standards to nearby countries than to China or India. He said that it is now easier for asset managers to raise money for Russia than in previous months.
Nassim Taleb applied the philosophical approach to the problem. He said that whatever is fragile will break, whatever is robust will remain. Russia is resilient after passing several crises in the last
century. It has no mortgage lobby forcing people to take loans, and it possesses natural resources and a scientific tradition that only a few other countries have. Brazil is in the same position, while the US has many problems. The US budget can survive only under a rosy scenario.
Kingsmill Bond said that those who place Russia at the bottom of the range in BRIC simply do not properly understand the situation. Russia has more raw materials, is more resilient to global warming, and has a far higher level of education, a much larger middle class, far less debt and a much better track record. Many concerns for Russia are irrelevant for the market, like demographics. The Russian population over the last 20 years has fallen from 148 mln to 142 mln, while the RTS Index surged from 100 to 1,800. The main thing that matters for the market is ROE. To have high ROE, the market has to have a lack of capital and lack of competition, which is the case for Russia. At the same time, other BRIC countries have their own problems, including youth bulge and high valuations in India, and excess capital in China, while Brazil has an expensive currency and is a consensus call for the market. The main problem for Russia is corruption, and the country has to fight this not to become poor.