Aton Capital in Moscow -
The continued strong performance of the Russian economy supports our view of local stocks as a good investment, despite the recent meltdown on global developed and emerging markets.
The Ministry of Economic Development and Trade (MEDT) estimates that Russian GDP continued to expand in the second quarter at near-record speed. The growth was particularly high in June, when GDP expansion accelerated to 8.2% on year, which helped offset the slowdown in April and put overall growth at 7.6% for the second quarter and 7.8% in the first.
In our view, the primary drivers of economic expansion were investment, which increased by a very strong 22.3% in the first half, and consumer spending, fuelled by real wages and personal incomes, which rose by 17.5% and 11.2%, respectively.
As a result of large-scale spending, major expansion was reported in all sectors exposed to investment and domestic consumer demand, such as construction, manufacturing and retail, which in the first half expanded by 24%, 9.7% and 9.2% respectively.
The MEDT estimates that these three sectors generated almost two-thirds of total GDP growth during the period. Particularly high rates of expansion in the first half were reported in sectors producing investment-related goods such as steel pipes (up 22.8%), tractors (16.8%), heavy trucks (19.8%), and cement (20.7%). Strong gains were also reported in sectors producing high-value household appliances (TVs, refrigerators, etc.), which all posted production increases above 20%.
In addition to rising domestic demand, the Russian economy also benefited in the second half from higher oil prices, which gave a significant boost to exports. MEDT estimates that Russian exports in June expanded by a robust 19.7%on year to another all-time high of $30.4bn, mostly due to higher oil prices. Overall, exports grew by 11.6% on year in the first half.
The improvement in external trade, however, was not the main driver of economic growth, as the increase in exports was more than offset by rising imports, which grew 35% in June to a near-record $19.7bn. As a result, the Russian trade surplus declined on year for the tenth month in a row, despite the high oil prices.
These developments are fully in line with our economic forecasts, and we expect strong economic expansion driven by investment and local consumer demand to continue throughout this year and the rest of the decade. We also expect the trade surplus to continue to shrink, disappearing completely by 2009. Our forecasts for real 2007 growth are: 7.1% for GDP, 18% for investment, 15.4% for average wages, and 13.5% for disposable incomes.
The continued strong expansion of GDP should result in solid first-half results for companies in sectors exposed to domestic consumer and especially investment demand, such as manufacturing, consumer goods, retail, banks and media. Most of the companies in these sectors of the Russian economy do not have significant exposure to global financial markets, and thus should be largely unaffected by the recent volatility.
Therefore, we expect the fundamentals of most Russian companies to remain strong.
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