Fidelity bullish on Russian mobile telecoms

Fidelity Worldwide Investment is bullish on the mobile telecoms sector in Russia within its global emerging markets portfolio.

The size of the Russian-speaking market makes it particularly easy to access. “The population of Russia is 140 million, but we mustn’t forget that there are also 100 million Russian-speakers living Ukraine, Georgia and so on,” says Nick Price, manager of Fidelity’s Emerging Markets and Emerging Europe, Middle East and Africa funds (pictured).

He is particularly optimistic on the holding companies within the sector, which trade at a 50% discount to the underlying companies. With a solid 8% dividend yield, they pose a compelling opportunity for an equity investor.

But this consumption story is an exception, rather than the rule. Price sees the sector as “over-traded” and generally avoids consumer goods in the fund’s holdings. He is not alone on this—similar concerns have been voiced by other Russia-oriented fund managers.

The problem with industries that rely on consumer demand is that they are often highly competitive, which drives down returns on investment. As an example, Price mentioned X5 Retail Group, a leading Russian food retailer, which had a profit warning last week.

X5 offers returns on investment of only 12%—around a quarter of what can be expected from investing in a similar theme in Africa, where the market has not yet been penetrated to the same extent. The local leading food retailer ShopRite, for example, can bring post-tax returns of 40-50%.

The focus on investment returns is part of the management team’s core philosophy. “Most people think about growth potential when it comes to emerging markets and often overpay for the idea of growth, but the most important thing is to have returns generated from that growth,” Price commented.

There are return-bearing opportunities in Russia. For example, some very large Russian oil companies are bringing in 5-6% dividend yields, which justifies investment, says Price. An example of such a company is LUKOIL. Another promising stock held in the fund is Sberbank, the largest Russian state-owned bank. Price said it is “extremely well-positioned” in terms of return potential.

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