Russia: Other Points of View

RUSSIA EQUITIES: BETWEEN A ROCK AND A HARD PLACE

FINANCIAL ANALYSIS

by Chris Weafer

The equity market continues to be driven by external events and news flow. Russia, like many other EMs that are deemed to be most at risk from slowing global growth, is considered a fringe investment theme and will remain so until the threats overhanging the US and EU are reduced.

This week, the main focus will again be external, with the next phase of the budget debate in the US and the US Federal Reserve’s monthly FOMC meeting likely to provide the major talking points, and have the greatest influence on investor attitude toward risk assets. Before that, however, the Cyprus deposit protection proposal has hit markets hard in Moscow and across Europe this morning as investors worry that this issue may escalate into a bigger political and economic crisis to destabilize the Eurozone.

Our base-case is that the volatility in 1Q13, such as we se today, should give way to calmer markets in the spring and early summer, when we expect to see the risk premium in Russian equity valuations decline. We recommend adding to portfolio positions during days like today and into any periods of weakness generally and again highlight our top stock picks in the table in the attached published note

The weekly fund flow data from EPFR Global shows that investors, who had added over $30 bln to EM equity funds in January and February, have become much more cautious since the start of March. Last week, they withdrew money for only the second time since the first week of September.

The domestic talking point this week will likely be provided by Russia’s February macro report, which is expected to again show a weaker economic performance than seen over the same period last year.

To access the full report, click here  Download Russia In Context - March 18 '13

RUSSIA IN CONTEXT: RUSSIA SUFFERS COLLATERAL DAMAGE

FINANCIAL ANALYSIS

by Chris Weafer

“Schopenhauer was right. Life without pain has no meaning. Gentlemen, I am here to give your lives… meaning.”

Dr Lindstrom (Red Dwarf)

Down w-o-w despite positive global dynamics. Russian equity indexes drifted lower last week in contrast with modest gains for the S&P 500, Chinese equities and the Brent price.

Off the table until reforms, forecasts bear fruit. Russia will remain a marginal theme in global markets until there is more visible progress in reforms and investors are more convinced that forecast economic growth and earnings can be delivered.

Russian equities are set to follow this week’s global events. This week, the equity indexes are more likely to play catch up if global markets climb further, while a weaker trend in the S&P 500 could push Russian equities lower.

Brent up, evoking caution. The Brent price breached the technical target of $118/bbl we highlighted last week. Saudi Arabia is expected to warn against a higher price and promise to add supply to bring the price back toward $110/bbl.

Quiet in emerging markets. Activity and news flow in emerging markets is expected to remain low this week due to the long Chinese New Year holiday and Carnival in Brazil.

US politics, US and EU macro in focus. The main global market events this week will be the State of the Union address in Washington, US retail sales and industrial production updates and flash GDP reports in the EU.

US, Spanish and Italian debt events are the main risk. The main risks to the fragile net-positive global market sentiment are that US debt and budget talks may break down or that Spain and/or Italy may move into crisis. Spain’s 10y Sovereign yield climbed to 5.52%, while the Italian equivalent reached 4.63% last week.

Tuesday’s Central Bank meeting the main domestic story. Benchmark rates are not expected to change, but the bank is again expected to warn about inflation dangers.

To access the full report, click here  Download In Context Russia Feb 11 '13

FINANCIAL ANALYSIS

by Chris Weafer

An optimist stays up until midnight to see the New Year in. A pessimist stays up to make sure the old year leaves. Bill Vaughan

Russia takes a nine-day break from next Sunday. Trading will be very quiet everywhere this week because of the Christmas holiday and the lead up to the New Year break. Moscow’s bourses will trade normal hours all week and will also open for a session on Saturday, but trading is expected to be very light. Russia’s New Year holiday starts next Sunday and runs until January 9.

US budget talks will dominate a quiet week. The normal seasonal lull this week will be interrupted by expected intensifying talks between the US presidential administration and Congress over terms to avert the consequences of higher taxes and spending cuts scheduled for January 1. Congress will return for a special session on Thursday. How investors view progress, or the lack thereof, will dictate how all markets close the year and the stance toward risk assets when trading resumes next Wednesday.

Reviewing 2012. In this week’s Russia in Context, we review the positive and negative events that impacted the equity market in Russia in 2012, which also may affect how investors view the balance between risk and opportunity in 2013. We also list the best and worst performing DRs in 2012 (to date) and how the market has performed overall.

To access the full report, click Download Russia 2012 Review

RUSSIAN ECONOMY

FINANCIAL ANALYSIS

by Chris Weafer

Weekly EM Equity Fund Flows: Russia’s Loss is Turkey’s Gain

Investor confidence in EM equities shows no sign of waning. For a 15th straight week, a substantial amount of new money was added to funds in the asset class. The total last week was $4.4 bln, marking one of the biggest weeks of 2012. The total added to EM funds YTD is now $48.2 bln. However, while confidence in potential profits from EM in 2013 is high, investors have no appetite for Russia-specific risk, taking money out of the country for an 11th straight week. The total withdrawn last week was $60 mln, but when Russia’s allocation from the GEM balanced funds is added, the total available was a positive $134 mln. Russia money was again mainly diverted to Turkey.

Another big week for EM fund flows. The weekly fund flow report from EPFR Global showed that a total of $4,446 mln (0.6% of AUM) was added to all EM funds for the week ended Wednesday. This is down from the $5,329 mln added the week before but is still one of the best five-day periods in 2012. Over the past 15 weeks, investors have added $32.8 bln to the asset class, or 68% of the total $48.2 bln received this year. Of the total, 60% was allocated to the GEM balanced category. Funds in this category have taken in $43.4 bln YTD, as investors still have little confidence to pick country-specific risk other than in Southeast Asia. China funds attracted $614 mln (1.2% of AUM) last week, confirming their standing as the dominant country recipient of new money since September. Last week, South Korea funds also attracted a significant inflow of $685 mln (5.43 % of AUM), all coming in via ETFs, as investors speculated on the outcome of the parliamentary election.

Russia’s loss is Turkey’s gain. Russia retail funds again reported a net outflow totalling $60 mln (0.45% of AUM) last week, marking the 11th straight week of net redemptions from Russia funds, most coming from traditional funds ($44 mln) rather than ETFs. It appears to have been a straight switch into Turkey retail funds as they picked up $52 mln (2.1% of AUM) for the period. However, Russia funds have a 7% weighting within the GEM balanced fund category and that allocation more than compensated for the direct fund redemptions. The net effect for the past week is that $34 mln was available, up from the net $127 mln allocation the previous week and the fourth consecutive week when GEM allocations converted directed retail outflows into a positive indirect flow.

To access the full report, click Download Fund Flows Dec 21

RUSSIA IN CONTEXT: ECB AND THE BIG MO

FINANCIAL ANALYSIS

by Chris Weafer

If the world should blow itself up, the last audible voice

would be that of an expert saying it can’t be done.
Peter Ustinov

Hoping the ECB has started a positive momentum. The story of Russian equity performance has been very straightforward all year. The market outperformed peers as global markets rallied when risk phobia fell, while the market underperformed when risk aversion rose. The specific headlines from Russia (the positive economic and earnings momentum, and the negative politics) have had relatively little impact. At the start of the summer, the hope was that policymakers would finally stop procrastinating, and take more pragmatic steps to start dealing with slowing economies and the Eurozone risk. Last week’s European Central Bank (ECB) decision is the first of four actions that now need to occur to convince investors that the summer rally in risk assets has a meaningful distance to run. The ECB has, to use the US political phrase, initiated what is hoped will be a sustainable positive momentum – the Big Mo – in markets.
Brief profit taking is likely.

After the strong gains of the past two days, a brief period of profit taking may occur today or in the next few days. But, if the US Federal reserve does deliver, then markets will again finish the week higher. Asia’s markets traded better on Monday morning on China stimulus hopes (see below), and both copper and Brent also rose, albeit modestly. 

To access the full note, click here  Download Russia In Context Sept 10

RUSSIA IN CONTEXT: CLIMBING OUT OF A HOLE

FINANCIAL ANALYSIS

by Chris Weafer

“Step up to Red Alert? Sir, are you sure? It does mean changing the light bulb”
Kryten (from Red Dwarf) 

Bernanke’s Jackson Hole speech will dominate. The last week of August is usually one of the quietest of the year for markets. Investors take advantage of the last week of summer vacation ahead of the start of the new investment season that immediately follows US Labor Day (next Monday). But investors will hardly even need that excuse to stay on the sidelines again this week. It remains very unclear whether the US Federal Reserve will add another round of QE, Germany will agree to restructure Greece’s bailout terms and China will take any action to buoy slowing economic growth. The first question may only be answered when Fed Chairman Ben Bernanke addresses the Jackson Hole conference on Friday.

Uncertainty will last until mid-September, at least. This global market context will remain the dominant driver of Russian asset valuations. The current high level of uncertainty will likely persist through the first half of September, as the ECB and German government may not make any decisions concerning additional support measures until Germany’s Constitutional Court rules on the legality of the country’s participation in the ECM. That ruling is due September 12, which is also the day when the next US FOMC decision is to be announced and a couple of days after China releases its next macro report. More of the same until then.

Oil to get support from expected IAEA statement. Oil may be more of an issue this week as the IAEA is expected to say that Iran has added more centrifuges and placed them deeper underground following a meeting between IAEA and Iranian officials last Friday.. The threat posed by the latest Gulf of Mexico hurricane has boosted prices today and reversed Friday’s decline. Strong oil will help the ruble and, while further aiding Russia’s fiscal and budget execution, it is of little concern to equity investors so long as global threats dominate.

To access the full note, click here Download Chris weafer_Ru_economy 

WHO OWNS THE RUSSIAN EQUITY MARKET AND WHY IT MATTERS

FINANCIAL ANALYSIS

by Chris Weafer

Good business leaders create a vision,
articulate the vision, passionately own the
vision, and relentlessly drive it to completion.

Jack Welsh 

Ownership structure matters for valuations. Companies dominated by strategic foreign investors generally have the best net margins and the highest dividend payouts. Companies with the highest minority investor content are more often near the bottom of the table in terms of valuation, while state-controlled companies still have a much lower dividend payout than others.

Operating environment influences financial metrics. When we look at the companies' operating environment, private, regulated companies that have to compete against state corporations appear to be the most profitable in terms of net margin, have the highest dividend payout and low leverage in terms of net debt/EBITDA, but moderate P/E and P/BV.

Relative freedom implies higher valuation at expense of lower profitability. We also look at companies under the category of "relative freedom", which combines the industry characteristics and restraints with the equity ownership structures. Here we find that the greater the freedom a company enjoys, the lower its net profitability but, in general, they have a high dividend payout. Greater freedom also implies lower EPS growth but higher P/E and P/BV ratios.

Russian equity market owned primarily by state and minority investors. The total value of the Russian equity market is currently $749 bln, or 40% of the expected value of GDP in 2012. The free float is currently 27%, while the state's equity stake is today at 30% and worth $223 bln. At the market's peak in May 2008, the value of the state's holding was $441 bln. ($80 bln of the difference can be accounted for by the expansion of Russia’s risk premium).

To access the full report, click here  Download Equity_STR

RUSSIA IN CONTEXT: BRIDLED ENTHUSIASM

FINANCIAL ANALYSIS

by Chris Weafer

History teaches us that men and nations behave wisely once they have exhausted all the alternatives.  

Abba Eban  

Small correction possible/likely. Although Friday’s relief rally may run into a small pullback today as the new quarter starts and investors reflect on the many reasons to be cautious, the level of optimism remains high that, at least over the short term, EU leaders and policymakers will make every effort to build on the enthusiasm with which their decision to allow the European Stability Mechanism (ESM) to directly help support the region’s banks was met. There is now a strong consensus that the ECB will add to those efforts with a rate cut at its meeting on Thursday. But, for now, the market chatter is only about a relief rally rather than the start of an extended bull market. There are still far too many variables that remain unresolved and too many steps still to be taken before the Eurozone’s problems can be structurally resolved. Most investors believe it only a question of when, rather than if, we return to crisis mode again.  

Focus will be on macro data. How far Friday’s rally is extended will have a lot to do with the strength of the economic indicators to be released in the US and China this week and, if they disappoint, what the US Federal Reserve and the Chinese authorities say or do in terms of stimulus promises. A busy week kicks off today with the monthly manufacturing indicators for all economies and ends Friday with the US payroll report. The past three have all disappointed and led to the gloomier mood and weaker markets through 2Q12. If investors get past this week with optimism still intact, the next major challenge starts next week with the 1Q12 earnings season in the US. Alcoa starts the process this week and the first of the big banks, JPMorgan, publishes its numbers on Friday. Plenty of reason for investors to be hopeful but with bridled enthusiasm for now. 

To access the full note with price performance tables plus the new QUICK GLANCE sentiment indicators (Tactical and Strategic), click here  Download Russia Context July 2 Bridled enthusiasm

FLOUTING THE ECONOMIC LAWS OF NATURE?

REPRINTS

Carnegie Council for Ethics in International Affairs

June 4, 2012

By David C. Speedie

Director, U.S. Global Engagement Program, Senior Fellow

Barely one month into his third term as Russia's president, Western Moscow watchers have been avidly reading the tea leaves of Vladimir Putin's early actions and policy signals. High on the list of speculations is the matter of Russia's economy—its current state and likely future trajectory.

Here, the president's moves to date have been, as an analysis in the Financial Times of May 31, 2012 suggested, "symptomatic of the fraught balancing act Mr. Putin must perform." As the FT article points out, Putin's economic advisors cover a broad spectrum, from cabinet "liberals," such as Igor Shuvalov and Arkady Dvorkovich, to the "hawkish energy tsar," Igor Sechin.

Putin himself, of course, is the man the West and the West-leaning Russian opposition love to hate and, in that spirit, his three-week record on economic performance and projection has already come under fire. At the center of the bull's-eye for the attacks have been the measures of "modernization" and growth the president has ordered the government to attain. These include:

JIM O'NEILL CHIDES RUSSIA'S CRITICS

REPRINTS

 

Business New Europe

May 25, 2012

"The most important thing linking Russia to the global market is the  low expectations," Jim O'Neill, chairman of Goldman Sachs Asset Management and investment guru, told a recent conference of VTB  Capital in London. "I get at least an email a day telling me to take  the 'R' out of BRIC and I take them as a reverse indicator: the more of these emails there are, the less Russia has to do to surprise  everyone."

O'Neill who coined the term BRIC about a decade ago as a marketing term for the opportunities to be found in Brazil, Russia, India and  China remains upbeat about Russia's prospects and gave the country's  detractors a stinging rebuke for what he calls judgements that are  "narrow and mired in personal interpretation" more than in fact.

Russian stocks have been punished more than most since the financial  meltdown in 2008 and are currently trading at a 50% discount to their  emerging market peers. And since panic began sweeping the market again in the wake of Greece's failure to elect a new government in the first half of May, the market has been punished again, seeing more investors exit than any other major emerging market. Yet the economy is doing surprisingly well. "In the first quarter of this year, Russia was the only BRIC to put in a positive surprise with its 4.9% growth [against  the official forecast of 3% of this year]. All the sell-side analysts  ended up revising up their forecasts for the year. In Europe, growth  was slow and the UK underperformed even that. Russia once again was  exceeding expectations."