“There has always been a discount on Russian equities because of political risk, but this widened too far,” said Edward Conroy, co-head of the bank’s Russia Fund. Moscow’s bourse is leveraged to the global cycle. It plunged 73pc in the credit crisis, but should rebound like a coiled spring as confidence revives.
Moscow stocks are trading at a forward price/earnings ratio of 5, compared to Turkey (7.2), Poland (9.6), China (10), and India (11.7). “Russia is unloved and undervalued. We think valuations will revert. It is more than just a commodity play,” he said.
Russia has the luxury of a clean balance sheet. Sovereign debt is 11pc of GDP. Mortgage debt is under 4pc. Such restraint has become a trump card in a post-bubble world where sovereign states are suspect. The Kremlin can borrow to rebuild Russia’s crumbling Soviet infrastructure, so long as OPEC stops the price of oil falling far.
HSBC is targeting consumer equities as rising pensions and the Medvedev welfare net unleash pent-up demand, rather than the energy shares that dominate Moscow’s exchange. Among the fund’s top picks are Magnit, the number two grocery chain with branches in southern Russia and the Volga, a play on 20pc annual growth in food retailing. It also likes food processor Cherkizovo, a catch-up play on meat consumption – now 62 kilos per capita (below Soviet levels of 78, the EU at 79, or the US at 117). “Cherkizovo has a return on equity of 20pc: that discount that is too big to justify,” said Mr Conroy.
Russian companies were hit hard by the global crisis because the lack of domestic bond market forced them to borrow abroad. Funding froze suddenly. Russia has learned the lesson. Home-grown bonds are driving recovery.
Yet critics remain wary. State spending has grown so fast that it now takes $90 oil to keep the budget in balance. The Reserve Fund has been raided, falling from $100bn to $30bn. The population will contract from 142m to 127m by 2050, according to the US Population Bureau.
India is a polar opposite: iffy in the short-run, irresistible in the long-run. Sanjiv Duggal, head of HSBC’s India Fund, said the country is near the “inflexion point” where per capita income (PPP) hits $3,000 a year, leading to a step-change in consumption growth. “The next ten years will take India to where China is today. It is a decade behind.”
Bombay’s bourse is the most costly of the BRICs on a P/E basis, but Mr Duggal said real estate is “under-owned” given that the ratio of house prices to incomes is near a modern low of 4.7. Maruti Suzuki is a way to gain exposure to the middle class blast-off story, claiming half India’s car market and 20pc sales growth; so is United Spirits, overtaking Diageo as the world’s top drinks producer by volume.
India weathered the credit crisis well thanks to a closed economy and a tough bank rules that impose a 30pc reserve ratio. Yet policy settings are now ultra-loose, with real interest rates of -5pc, a state and federal budget deficit above 10pc GDP (with subsidies), and a public debt at Western levels of 80pc. This scores badly in the BRIC beauty contest.
Meanwhile, the jury is out on whether China can manage a soft-landing using credit curbs after letting rip with $2.1 trillion of lending over the last 18 months. Optimists say Shanghai’s bourse has already purged excess, falling 55pc since late 2007.
Mr Timberlake said Beijing’s control over the banks gives it the tools to prevent the slowdown going too far. “They have taken their foot off the brake over the last few weeks,” he said.
He sees vast potential for a further leap forward as 1pc of the population – twice London – moves from country to city each year, shifting up the income ladder. “There are 400 cars per thousand in the West, and 28 per thousand in China. This is a huge structural story,” he said.
The catch-up sectors are health-care, travel, cosmetics, insurance, and luxuries like chocolate. China already has 450,000 dollar millionaires. Chinese have bought more Mercedes this year than Americans.
As usual, the US will lead events. The BRICS are strong enough these days to decouple if the US slowdown is just a soft patch: they will recouple fast if America stalls.