(By Imari Love) One quarter into 2012, Russia has been far and away the most impressive stock market on the grid. A mix of surging oil prices, rising wage growth, lower inflation, and a strengthening ruble has set the stage for one of the healthiest consumer environments the country has seen in years. The two major publicly traded telecom carriers, Mobile TeleSystems (MBT
) and VimpelCom (VIP
), performed handily in the first quarter. As we begin to see margins stabilize and capital expenditures level off, free cash flow could increase at a faster-than-expected rate. This, combined with the prospects of a second-half interest rate cut in Russia, low smartphone penetration rates, and 5% dividend yields, means share price outperformance could be sustainable.
Russia's stock market performance underscores an impressive economic rebound that's been supported by improving real wage growth and inflation levels hovering around 20-year lows. This has produced a surge in disposable income, which has spurred a revival in wireless subscriber growth despite astronomically high penetration rates (157% at the end of December). In fact, all aspects of the consumer sector seem to be improving, as retail sales jumped 7.7% year over year in February, easily besting expectations. The economic upswing has been buoyed by a 37% increase in oil prices over the past six months. The oil price strength is a combination of stronger global GDP growth assumptions (now that fears of a complete European collapse have been quelled) and Iran-Israel conflict premiums. Regardless of commodity prices, President-elect Vladimir Putin remains adamant about raising salaries, and with unemployment still far lower than normal (6.5% in February) and the prospects for second-half rate cuts, the stage is set for consumer-based industries such as telecom to flourish.
First-Quarter Global Stock Market Performance
Source: Morningstar Investment Research
Competitive and Regulatory Landscapes Also Improving
While MegaFon has been able to steal subscribers from Mobile TeleSystems over the past couple of years, we believe the sector has now reached its comfort zone in terms of share distribution. With churn rates rising across the board and margins in decline, we are already seeing the major operators becoming more rational. Ultimately, the big three players in the oligopoly seem resigned to split 85% of the market, with Tele2 and Rostelecom having to work from their leftovers.