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Russian resolution

At times like this, we believe investors need to stand back from the market noise and focus on the long-term growth prospects of the regions in which they invest and, on this basis, Russia scores exceptionally highly.

One of the important criteria that investors look at when assessing investment risk in emerging markets is the political backdrop.

In the run-up to the Russian election, this risk was reduced because Medvedev, as the former chairman of Gazprom, is well known to the international investment community. As we expected, we saw a smooth transition of power when he became president and Putin became prime minister. We are cautiously optimistic that Medvedev may push a pro-reform agenda and we could see further liberalisation measures within Russia.

The negative impact of the credit crunch on the US and therefore the global economy is becoming clear. Against this backdrop, we expect equity market volatility to persist. Short-term equity market gyrations aside, the long-term investment case for Russia is compelling.

While it benefits from the growth of economies overseas, Russia’s own growth is also being driven by high levels of infrastructure spen-ding. The relatively defensive nature of Russia’s economic growth further strengthens the investment case for the market. We expect the Russ-ian economy to grow by around 7 per cent this year.

Russia, as a major exporter of oil and gas and many industrial metals, is taking full advantage of the increase in commodity prices. Rising income levels, wages and increasing retail credit point to strong domestic consumption growth. Taken together, these factors bode well for the coming year.

The portfolios I manage are focused on sectors that we expect to benefit from robust domestic growth demand and on companies that have a sustainable competitive advantage or that will benefit from infrastructure spending. We believe the earnings of such companies are less likely to be affected by any global slowdown. Examples include cement producers and steel companies.

In addition, we have positioned our portfolios to benefit from increased consumer spending via our holdings of mobile telecoms, banks and retail companies. We also have an emphasis on the growth in agriculture and food demand both locally and globally. In relation to Kazakhstan, our exposure remains concentrated on mining companies which are benefiting from high commodity prices and so are less affected by the slowdown in the local economy there.

Investors need to be aware that a number of possible developments might trigger a period of heightened market volatility These could include a further deterioration in the outlook for inflation as food and energy prices continue apace, adverse political developments and/ or a global event that adversely impacts on the broader equity markets. In any of these scenarios, Russia’s equity market would be negatively impacted, too.

But periods of heightened volatility can generate great investment opportunities. We are confident that our funds are well placed to take advantage of the many opportunities offered by Russia’s equity market, which includes vast deposits of natural resources, consumers who have not built up high levels of debt, superior economic growth and attractive share price valuations.

Dr Ghadir Abu Leil-Cooper is investment manager of the Baring Russia fund

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