The Russian economy is navigating choppy waters. Recent Purchasing Managers’ Index (PMI) data reveal a deepening contraction in both manufacturing and services sectors, with June’s manufacturing PMI plummeting to 47.5—the steepest decline since early 2022—and services PMI dipping below 50 for the first time in a year. While these readings signal heightened macro risks, they also illuminate opportunities in defensive sectors like utilities and consumer staples, where resilience to demand shocks and undervalued pricing create compelling entry points.
A Dual Contraction: Manufacturing and Services Falter
The manufacturing sector’s June PMI contraction was driven by plummeting new orders (—sharpest since March 2025) and export sales (—steepest since November 2022), with weak domestic demand and unfavorable exchange rates exacerbating the downturn. Meanwhile, services PMI fell to 49.2, marking its first contraction in a year. New business growth stalled, and firms cited softer client demand and rising input costs (e.g., supplier prices and wage bills) as key challenges.
This synchronized slowdown underscores a broader economic deceleration. Forecasts suggest manufacturing may rebound modestly to 53.7 by year-end, but long-term PMI projections (51.3 in 2026, 50.7 in 2027) remain below historical averages, signaling a prolonged period of subdued growth. Against this backdrop, investors must prioritize sectors with structural buffers against cyclical headwinds.
Defensive Sectors: Stability Amid the Storm
Utilities and consumer staples emerge as top candidates for defensive plays. These sectors are less sensitive to economic cycles, offering steady cash flows and inelastic demand.
Utilities: A Regulated Haven
Russia’s utilities sector, dominated by state-backed firms like Inter RAO and PJSC Mosoblgaz, benefits from regulated pricing and stable demand. Even as energy costs rise, these companies face limited exposure to commodity price swings due to government-mandated rate frameworks.
Valuations here are attractively low. Utilities stocks currently trade at P/E ratios 15-20% below their five-year averages, reflecting market pessimism about broader economic health. However, their dividend yields (averaging 6-8%) are among the highest in emerging markets, offering downside protection.
Consumer Staples: Necessity-Driven Demand
Firms in food and household goods (e.g., Wimm-Bill-Dann, Svyaznoy) cater to essential needs, which remain robust even during recessions. While luxury goods sales may slump, staples like packaged foods and cleaning products show relative resilience.
Input cost pressures (e.g., rising wheat prices) pose a short-term challenge, but many companies have pricing power to pass through costs. For instance, Wimm-Bill-Dann recently announced a 5% price hike on dairy products without significant volume loss.
Valuation Discounts and Structural Strength
Both utilities and consumer staples are trading at discounts to their historical averages, with consumer staples stocks down 18% year-to-date as investors rotate out of cyclical equities. However, their earnings volatility is far lower than that of manufacturing or energy firms, making them less prone to sharp sell-offs.
Cautions and Risks
While defensive sectors offer shelter, investors should avoid cyclical exposures. Manufacturing and materials stocks (e.g., Severstal, NLMK) remain vulnerable to declining export demand and input cost volatility. Services firms reliant on discretionary spending, such as hospitality or travel, face similar headwinds.
Additionally, geopolitical risks persist. Western sanctions and energy price fluctuations could disrupt even the most stable sectors. Investors should pair sector bets with macroeconomic hedges, such as short positions on the ruble or inflation-linked bonds.
Investment Strategy: Pick the Right Defensive Plays
– Utilities: Target firms with strong balance sheets and regulated rate structures.
– Consumer Staples: Focus on companies with pricing power and minimal reliance on imported inputs (to mitigate currency risk).
– Valuation Discipline: Prioritize stocks trading below 10x forward P/E and yielding above 6%.
The current PMI-driven slowdown is a test of resilience—not an existential crisis. For investors with a long-term horizon, the underperformance of defensive sectors presents a rare chance to buy quality at a discount.
— news from AInvest
— News Original —
Russia’s Defensive Sectors Offer a Safe Harbor in the Economic Slowdown
The Russian economy is navigating choppy waters. Recent Purchasing Managers’ Index (PMI) data reveal a deepening contraction in both manufacturing and services sectors, with June’s manufacturing PMI plummeting to 47.5—the steepest decline since early 2022—and services PMI dipping below 50 for the first time in a year. While these readings signal heightened macro risks, they also illuminate opportunities in defensive sectors like utilities and consumer staples, where resilience to demand shocks and undervalued pricing create compelling entry points. n nA Dual Contraction: Manufacturing and Services Falter n nThe manufacturing sector’s June PMI contraction was driven by plummeting new orders (- sharpest since March 2025) and export sales (- steepest since November 2022), with weak domestic demand and unfavorable exchange rates exacerbating the downturn. Meanwhile, services PMI fell to 49.2, marking its first contraction in a year. New business growth stalled, and firms cited softer client demand and rising input costs (e.g., supplier prices and wage bills) as key challenges. n nThis synchronized slowdown underscores a broader economic deceleration. Forecasts suggest manufacturing may rebound modestly to 53.7 by year-end, but long-term PMI projections (51.3 in 2026, 50.7 in 2027) remain below historical averages, signaling a prolonged period of subdued growth. Against this backdrop, investors must prioritize sectors with structural buffers against cyclical headwinds. n nDefensive Sectors: Stability Amid the Storm n nUtilities and consumer staples emerge as top candidates for defensive plays. These sectors are less sensitive to economic cycles, offering steady cash flows and inelastic demand. n nUtilities: A Regulated Haven n nRussia’s utilities sector, dominated by state-backed firms like Inter RAO and PJSC Mosoblgaz, benefits from regulated pricing and stable demand. Even as energy costs rise, these companies face limited exposure to commodity price swings due to government-mandated rate frameworks. n nValuations here are attractively low. Utilities stocks currently trade at P/E ratios 15-20% below their five-year averages, reflecting market pessimism about broader economic health. However, their dividend yields (averaging 6-8%) are among the highest in emerging markets, offering downside protection. n nConsumer Staples: Necessity-Driven Demand n nFirms in food and household goods (e.g., Wimm-Bill-Dann, Svyaznoy) cater to essential needs, which remain robust even during recessions. While luxury goods sales may slump, staples like packaged foods and cleaning products show relative resilience. n nInput cost pressures (e.g., rising wheat prices) pose a short-term challenge, but many companies have pricing power to pass through costs. For instance, Wimm-Bill-Dann recently announced a 5% price hike on dairy products without significant volume loss. n nValuation Discounts and Structural Strength n nBoth utilities and consumer staples are trading at discounts to their historical averages, with consumer staples stocks down 18% year-to-date as investors rotate out of cyclical equities. However, their earnings volatility is far lower than that of manufacturing or energy firms, making them less prone to sharp sell-offs. n nCautions and Risks n nWhile defensive sectors offer shelter, investors should avoid cyclical exposures. Manufacturing and materials stocks (e.g., Severstal, NLMK) remain vulnerable to declining export demand and input cost volatility. Services firms reliant on discretionary spending, such as hospitality or travel, face similar headwinds. n nAdditionally, geopolitical risks persist. Western sanctions and energy price fluctuations could disrupt even the most stable sectors. Investors should pair sector bets with macroeconomic hedges, such as short positions on the ruble or inflation-linked bonds. n nInvestment Strategy: Pick the Right Defensive Plays n n- Utilities: Target firms with strong balance sheets and regulated rate structures. n n- Consumer Staples: Focus on companies with pricing power and minimal reliance on imported inputs (to mitigate currency risk). n n- Valuation Discipline: Prioritize stocks trading below 10x forward P/E and yielding above 6%. n nThe current PMI-driven slowdown is a test of resilience—not an existential crisis. For investors with a long-term horizon, the underperformance of defensive sectors presents a rare chance to buy quality at a discount.