Focus on Russia – HSBC’s Conroy makes a case for investing in Russia’s regions

Equity investors in Russia have traditionally focused their attentions on Moscow and St. Petersburg, but it is worth keeping an eye on the country’s peripheral regions.

Edward Conroy, manager at HSBC Asset Management, said: “Most people only see the companies that are based in Moscow, but there is quite a large part of the population which doesn’t happen to be in Moscow.”

One need only look back at the Soviet times to discover a wealth of resources built in locations far removed from the capital. The location of these assets is “not very commercially viable,” so an injection of capital is required to make them easier to access.

An example is the development of hydroelectric power stations in remote parts of the country. Russia is vast, but electricity cannot be transported over such long distance without significant energy loss. The solution is construction of aluminium smelters to transport this “stranded” hydroelectric power.

Conroy says one way to gain exposure to this theme is through Rusal, the world’s largest producer of primary aluminium, whose competitive advantage is this cheap source of electricity.

Admittedly, the stock has underperformed over the past year due to weak aluminium prices. But Conroy is convinced a rebound is to be expected in the long term and there is profit to be made. Currently, the stock is trading at 30% discount to book value, so the upside potential is significant.

Conroy identifies a range of other industries that combine exposure to Russia’s regions with growth potential. A prominent one is the infrastructure sector. This industry is on the government’s top investment list, as it prepares for the Sochi Winter Olympics, coming in less than two years, and for the football tournament in 2018.

Conroy said: “The government has a multiyear infrastructure development programme, much of which is directed towards the regions. Steel makers like NLMK (based in Lipetsk) are both based in the regions and also are selling a significant amount of their product to the regions.”


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