Ben Aris in Moscow -

Sberbank CIB held a press conference on February 5 to announce something that (without wanting to be facetious) many knew already: Russian consumer stocks have not only outperformed the rest of the market, but outperformed all emerging market indices for most of the last decade.

The difference is that the guys at Sberbank have done their homework - a lot of homework - and put some real meat on the conceptual bones of investing into the Russian consumer story. Plus they have developed an index based on the 24 best names with major exposure to Russia's consumer story called the "Ivanov Index", which will be listed on Bloomberg under the ticker "IvanovCIB" so fund managers can measure just how well this story is playing out.

"The Russian story is not one about oil, gas and metals, but it is a consumer story," argues Andy Smith, Sberbank's head of research. "The consumer companies have been outperforming yet two thirds of the companies listed on the exchange are raw materials producers."

The index is not made up exclusively of companies belonging to the consumer sector, as there are not enough Russian listed companies directly catering to the consumer, like supermarkets. Instead, the index includes some names that benefit from the growth of consumer demand with two degrees of separation, like fertilizer company Uralkali, which is growing because Russian agriculture is growing, which in turn is growing because Russians are buying more and better food. Likewise, financial services are usually classed as "financial," but in this case are lumped into the consumer bracket. Indeed there are even a few names in there that are not even Russian, like Ukrainian chicken farmer MHP.

Still, lets not quibble, as the basic idea is solid. Russia's emerging middle class has already emerged a fair way and now accounts for 55% of the population (defined as Russians with an income of between $6,000 and $15,000 a year). Their spending has taken over from oil and gas as the main driver of the economy.

One of the more controversial claims that Sberbank is making is that the increase in per-capita GDP won't slow any time soon. Currently, Russia is clearly the fastest growing of all the BRICs in this regard, and Smith predicts that Russia will go from 45th in the world in terms of per-capita GDP to 4th or 5th by 2050. Although countries like China and India are growing faster economically, Russia's demographics works to its advantage in that the wealth will be concentrated in fewer hands, which in turn will drive the consumer sector faster.

Here the research kicks in, as Sberbank shows that oil and gas actually contributed little materially to Russia's super-strong growth before the crisis hit in 2008, with almost all the gains coming from retail and services since about 2000. Oil obviously does play a role, as it accounts for two-thirds of exports and a bit less than half of the government's tax revenue. "It's the fuel," says Smith. "But the producers, retailers and processors are the engine of this growth."

The index is investable and will be updated and rebalanced bi-monthly, based on the bank's ongoing consumer research as well as its partner Euromonitor's surveys.

Kings of retail

The report, entitled "Consumer Speed Kings: Team Russia Leads the World" (that includes a cartoon on the cover - the trademark image of Troika Dialog, which was merged into Sberbank last year), compares Russia with other emerging markets, including Brazil, India, China, South Africa and Turkey, as well as the Eurozone and the US. It combines a top-down domestic consumption growth mega-theme analysis with a bottom-up assessment of individual equity investment opportunities.

"Domestic consumption (not the extractive industries) has delivered 80% of Russia's economic growth since 2004: the consumer-linked industries have driven almost all of this growth," the report claims. "Russia is set to become the biggest consumer market in Europe and the world's fourth largest by 2020; Russia's annual total consumer sector activity may climb to $3 trillion by 2025," up from $670bn in 2012.

"All of Russia's retail companies are hugely undervalued," Smith tells bne. "Even [supermarket chain] Magnit, if you compare it with its peers in the West. There, companies are expensive, but they are priced for growth that they are clearly not going to achieve. CEOs at multinationals will be forced to look at Russia, which is growing at above trend, yet the valuations are still very cheap."

As bne has consistently argued for several years now, Russia comes out very favourably from most BRIC comparisons and already has by far the biggest proportion of middle class among the BRIC countries with a GDP per capita level that will take more than 10 years for Brazil, India and China to achieve, according to Smith.

Indeed, while some experts believe that many of Russia's retail companies are reaching maturity, Sberbank's research suggests that actually, "the Russian consumer market is still early-cycle relative to the other BRIC economies and continues to benefit from pricing resilience and low levels of penetration."

For example, Magnit trades at a price/earnings multiple of around 30-times, which is extremely high for a Russian company. However, it still commands less than 10% of the market and is planning to roll out 1,000 new stories this year alone. That's Smith's point: the multiple tells the investor little, as over the next few years the sizes of companies like Magnit and its supermarket cousins are going to increase by orders of magnitude and valuations that make little sense of current metrics.

On the flip side, even the current valuations are depressed due to Russia's poor investment image and perceived "oil risk image". "Russia's implied equity risk premium is trading at a near 10-year high," says Smith.

As such, the Russian the equity market has largely missed out in the recent return of fund flows to the emerging markets as normalcy slowly reasserts itself. "The aggregate Russian consumer sector is trading at a 25-50% valuation discount versus Brazil, India, China, Turkey and South Africa, while expanding its aggregate earnings materially faster. We forecast Russia's listed retail sector revenues will grow by circa 23% in 2013."

This growth should attract more investment and feed an expansion of mergers and acquisitions. Sberbank expects mergers and strategic alliances across the wider Russian consumer sectors to pick up and lists the most likely candidates in their report.

But perhaps the most useful part of the index and its associated research will be the surveys done to predict where the retail trends are headed. The inaugural survey threw up some interesting indicators:

• While 2012 was challenging in terms of personal income and concerns over the direction of the Russian economy, most consumers are now more optimistic and expect an improvement in their personal situation in 2013;

• While optimistic, the majority of Russians are still not yet confident enough to make major purchases. Most people are holding back from big-ticket purchases, while waiting for evidence of better economic growth;

• Within the big-ticket category, a surprising 42% of people still plan to change their car within the next two years;

• A majority of people own their existing home (only 11% rent), but approximately half plan to upgrade to a newer home in the near term;

• Customers are increasingly price sensitive: 37% of respondents consider price attractiveness as a key factor in whether, and where, they buy;

• In selecting a supermarket, price and the quality of goods are significantly greater considerations for food shoppers than interior layout or service;

• Inflation and unemployment are key areas of concern for most of the population, although there is healthy optimism: 44% say they expect an improvement in their personal wealth in 2013 compared with 2012;

• Most people see the high level of corruption as one of the main reasons holding back economic development in Russia. They see the fight against corruption as one of the government's key priorities;

• The number of people who say they would be prepared to emigrate, considering economic and lifestyle prospects to be better elsewhere, is still extremely high at 38%;

• Stock-specific findings reinforce its positive stance on multiple Russian equities, including Magnit, Dixy Group, Yandex, MegaFon, MTS, LSR Group, Etalon Group, Sollers and Aeroflot.