Russia: Other Points of View

EMERGING MARKET FUND FLOWS: RISING OIL PRICE MAY AGAIN BOOST RUSSIA FLOWS

FINANCIAL ANALYSIS

by Chris Weafer

Reticent optimism. Investors started the New Year with a net aggregate investment of $465 mln into emerging market (EM) funds in the week ended Wednesday according to data collected by EPFR Global. That is up from the net redemption of $309 mln during the last week of 2011 and ends a six straight week of losses during which investors withdrew $11.2 bln from EM funds. The weekly flow, although positive, is a lot less than the $3.4 bln invested into EM funds during the first week of 2011. Investors are hopeful that the current low valuation base across EM equities provides a good basis for performance this year but clearly remain wary of the threat to global growth posed by the unresolved euro zone debt crisis.
 
EMEA funds again worst hit. That caution is also reflected in the fact that all of the new money invested into the asset class last week went into the relative safety of EM Balanced Funds while all country specific funds reported continuing net redemptions. EM Balanced funds attracted $841 mln, or 0.25% of AUM in that category) while Asia country funds lost $703 mln (-0.06% of AUM), LatAm funds shrunk by $176 mln (-0.17% of AUM) and EMEA funds lost $188 mln (-0.48% of AUM) and

EQUITY FUND FLOWS: EM PORTFOLIO ALLOCATIONS TO RUSSIA TURN NET POSITIVE

FINANCIAL ANALYSIS

By Chris Weafer

Investors remain wary of EM risk. Investors cut exposure to emerging market equity funds again last week, extending the run of redemptions to a sixth straight week. Even though economic indicators in the US and elsewhere have generally been positive in recent months, investors clearly fear that the euro zone debt crisis may escalate and affect all major global economies. But the net total taken out last week was only $308 mln and that was a big improvement on the $4.3 bln redeemed the previous week.
 
Portfolio managers reversed a long negative trend. Investors in Russia dedicated funds also reduced exposure for a sixth straight week, withdrawing $109 mln compared to $139 mln the week earlier. But an encouraging sign is the fact that portfolio managers in the big EM regional and thematic funds allocated new money to Russia last week for the first time in eight weeks. The allocation was small at $18 mln but compares with a net withdrawal of $274 mln the week earlier. Portfolio manager allocations have always been a leading indicator of fund investor activity in subsequent weeks.
 
EM investors moved to safety of Balanced funds. According to the EPFR Global report, for the week ended Wednesday, traditionally one of the quietest of the year, investors allocated new money to EM Balanced funds ($759 mln, or 0.25% of AUM) in a move to safety away from country specific bets. Asian regional funds lost $703 mln (-0.36% of AUM), LatAm funds lost $176 mln (-0.4% of AUM) and EMEA lost $188 mln or 0.6% of AUM. All major country funds reported net redemptions equal to approximately 1.0% of AUM.
 
Russia attracted over $4.4 bln in early 2011. For the year (see graphs on next page), Russia country funds were significantly less affected by investor redemptions than their major EM peers. India country funds lost $3.8 bln in redemptions through 2011, China funds lost $3.2 bln and Brazil country funds lost $2.2 bln. In contrast, Russia country funds only lost $166 mln for the full year, mainly because these funds attracted over $4.4 bln in the first four months of 2011 while peer group funds have seen a steady flow of redemptions all year.

To access the full report, click here  Download WeeklyEquity_Fund_Flows_Dec_29

RUSSIA WEEK: NEW GAME - NEW RULES

FINANCIAL ANALYSIS

by Chris Weafer

"The inherent vice of capitalism is the unequal sharing of blessings;

the inherent virtue of socialism is the equal sharing of miseries"

 Winston Churchill 

There are three events in the diary for this week that have significance for Russia’s markets as we head into 2012. The first of those is the migration of the RTS cash equity business to MICEX today. The second is the first session of the new, and likely more demanding, Duma on Wednesday. The third is the next mass protest planned for central Moscow on Saturday. All have potential implications for government policy, foreign investor activity in, and perception of, Russia assets and for some specific stocks and themes. 

These events come after a generally good news week for the investment story in Russia, which, because of the dominance of external drivers and political risk dominating the headline in international media, had less of a market impact than they deserved. Russia’s WTO membership application was approved after almost eighteen years of negotiations; PM Putin made a few, but significant concessions during his televised Q&A session; macro data confirmed a steadily improving growth trend in the economy and national balance sheet that is already one of the best in the world. The decision taken by OPEC ministers also creates a better basis for assuming an average oil price of between $100 - $110 p/bbl for 2012, albeit we may still see Q1 weakness before Mid East regional risks rise again in Q2.

As western markets now head into the usually quiet Christmas and New Year holiday, there should soon be less external impact on the domestic market and the domestic news headlines will be more of a dominant driver. But, before we get to that period, there is the potential for a few more external bumps as, e.g.  the war of words continues over the rating agencies review of European sovereign ratings debt ratings and we get the usual end-year populist statements from political leaders across the region. Euro area Finance Ministers will hold a conference call later today to try and advance the rescue talks. The death of North Korea's leader also adds an additional element of uncertainty into already nervous markets. Asia's bourses are lower across the board at mid-session today as investors again prefer the dollar as the haven asset. One month Brent is at $102.69 p/bbl, copper is off 0.9%, gold is dowb 0.3% at $1,597.6 per ounce, silver is off 2.1% and the dollar-euro rate is at $1.3015.

To access the full report, click here  Download Russia_Week_Dec_19

DRIFTING INTO THE HOLIDAYS

FINANCIAL ANALYSIS

by Chris Weafer

Today: Asia’s markets are trading a little lower this morning, reflecting the weaker close in the US as investors in that market reacted to weaker than hoped for retail sales and the US Fed’s FOMC meeting added nothing new after its monthly meeting. The S&P 500 closed yesterday down 0.9% while the index was up 0.25% when Moscow closed. The key drivers in all global markets remain euro zone debt and the threat of a sovereign debt ratings downgrade across the region. For Russia investors the OPEC minister’s meeting may affect where oil trades later today. Brent is currently at $109.2 p/bbl. Copper is down 0.7%, after falling 0.4% yesterday. Gold is at $1,642.6 per ounce, off 1.2% this morning, and the dollar-euro rate is at $1.303.
 
PM Question Time tomorrow: Prime Minister Putin will host his annual live Q&A session tomorrow and that will provide him with the opportunity to give his thoughts on last week’s protests and to respond to the reasons that led to the event. Also tomorrow the WTO Council will consider Russia’s application for membership of the global trade body.

RUSSIA EQUITY STRATEGY: MOSCOW IS A LONG WAY FROM CAIRO

FINANCIAL ANALYSIS

by Chris Weafer

 “If I were there, protest music would be important. But I’m not going”

Nina Simone  

Yesterday’s sharp fall in the Russian equity market was an over-reaction to reports of Moscow street protests. While events across North Africa and the Middle East earlier this year suggest it is foolish to dismiss such events as not having consequences, in Russia those consequences are much more likely to play out over the term of the next parliament rather than dramatically at present. 

Sharp market reaction 

Equities and the ruble took a hit. Russian equities fell hard yesterday as a reaction to media reports of widespread public protests against Sunday’s parliamentary election. Reports referred to multiple protests and arrests alongside a heightened security presence in Moscow and other major cities – the clear impression being that Russia is in danger of experiencing its own Arab Spring event and that the election outcome may mark the start of a winter of discontent in Russia marked by social instability and political uncertainty. That fear was the major reason for the 4.7% fall in the RTS Index, the 4.0% loss on MICEX and the 6.4% decline in the IOB GDR index. Those losses compared with a fall of 1.3% for the MSCI EM Index. The ruble was another casualty, falling 24 bps against the dollar and 11 basis points against the euro by the close of MICEX trade yesterday.

The full note can be downloaded here  Download Strategy_Moscow_long_way_from_Cairo

RUSSIA WEEK: HOPING THERE IS A SANITY CLAUS(E)

FINANCIAL ANALYSIS

by Chris Weafer

"The world's largest central banks acting in concert is about as reassuring as watching an anti-tank ditch being dug. One can't help wondering what's coming next"

Geoffrey T. Smith, Wall Street Journal

Political sanity can drive markets higher this month. After last week's global market euphoria, the hope is that events this week can validate the return of optimism and sustain a market rally across the Christmas and New Year period. Whether that is possible of fails will principally depend on Europe’s politicians and China’s growth indicators. Both will come to a head on Friday. Before that, today’s meeting between the German and French leaders will set the tone ahead of the EU leaders meeting on Friday. Commentators in the weekend media were equally split as to whether the proposed actions are ambitious enough or are even politically possible. But most agreed that the right comments from politicians this week could push asset prices a lot higher through December.

Duma election is close to consensus. News from Europe will be the main driver of the Russian markets today even as the news of the Duma election result will dominate the domestic headlines. With almost 90% of the votes counted, United Russia appears to have held onto an absolute voting majority, albeit just barely. That was the consensus expectation amongst investors so should have little direct impact on where Moscow’s bourses and the ruble trade today. 

To access the full report, please click here  Download Russia_Week_Dec_5th

RUSSIA TODAY: COOKING WITH GAS

FINANCIAL ANALYSIS

by Chris Weafer

Italian news will dominate. Asia’s markets are alternating between a small gain and small loss this morning as investors wait for what they see as a crucial vote in Italy’s parliament later today. A loss for the Prime Minister will widen the bond default gap and send all markets lower at least as an initial reaction. One bright spot for Russia is that oil is again higher, trading at $114.5 p/bbl at mid session, along with copper (+0.9%) and some other metals as China demand is holding steady. That should again help the oil majors and the ruble to add to yesterday’s gains, albeit modestly. Gold is also better, up 0.2%, an silver is 0.5% higher. But, net net, it will be a case of nervously watching, and reacting to, news from Italy today.

Today: Apart from waiting for news from the Italian parliament the other events today include an update on UK industrial production and the 2012 oil market outlook from OPEC. The IEA will publish its 2012 oil market outlook tomorrow. Neither report is expected to contain any major surprises and both are likely to re-state that the oil price remains dependent on the strength of demand from China, other Asia and other developing economies rather than from developed economies.

RUSSIA TODAY: GLOBAL COLLATERAL DAMAGE

FINANCIAL ANALYSIS

by Chris Weafer

Greek referendum hopes dashed. Equities and the ruble face more pressure from the start today after the EU and  IMF decided to withhold the agreed aid to Greece after failing to dissuade the country from holding the referendum in early December. Estimating the consequences of a rejection will preoccupy investors through November and will extend the current state of global market nervousness. Against this background, news that Russia and Georgia have reached a deal that will allow Russia complete the WTO admission process by mid December will be lost as collateral damage for now. Nevertheless, the news is very positive and ticks a very important box for the relative investment case heading into 2012.

Another nervous session. Asia's markets are trading lower at mid session as a reaction to the latest news from Europe. The price of Brent is just below $109 p/bbl and looks to be very precariously perched. Oil traders are looking nervously at the dollar-euro market, currently down again at $1.369, and any further dollar strength, i.e. against the backdrop of EU crisis, could see oil start to track back towards the $100 p/bbl support in the coming weeks. That clearly would be very negative for Russian equities and ruble support. Gold is currently holding steady from yesterday's close at $1,729.7 per ounce.

RISING OIL RISK PREMIUM AND WTO PROSPECTS

FINANCIAL ANALYSIS

by Chris Weafer

I'm living so far beyond my income that we may almost be said to be living apart

                                                                                                             E. E. Cummings

Asia’s markets have started the week by extending Friday’s gains on Wall Street. Commodity prices are also trading better as investors interpret events in Europe positively. One month Brent is above $110 p/bbl and copper is 3.2% higher. Gold last traded at $1645,9 p/oz and the euro is also up against the dollar at $1.389. All of which bodes very well for a positive start to the week’s trade on Moscow’s bourses and for strengthening of the ruble relative to the dollar.

There are currently three important events that, depending on how they play out, will have an important impact on how Russian equities and the ruble trade over the remainder of 2011. All three are external to Russia. These are a) the policy response in Europe and the US to the euro zone debt threat and the risk of a slowing in the US economy, b) Russia’s WTO entry process and, c) events in North Africa and the Mid East.

To access the full report, please click here  Download Russia_Week_Oct_24

HALCYON MARKET DAYS

FINANCIAL ANALYSIS

by Chris Weafer

                                                              "It isn't so much that hard times are coming;                                                                         The change observed is mostly soft times going" 

                                                                                                            Groucho Marx

 After a disastrous 3rd Qtr for equities, commodities and developing economy currencies, the 4th Qtr has started with a great deal more hope. The S&P 500 is up 11% from the start of the month and the MSCI World and EM indices are 7.5% and 6.3% higher respectively. The RTS and MICEX gained 10.5% and 6% respectively last week alone. There is considerable optimism that this rally can run much further as European leaders show greater determination to tackle the debt crisis and US economic indicators and corporate earnings, albeit slowing, have not fallen off a cliff.

In particular, there was an audible sigh of relief in global markets last week as EU leaders reacted quickly to Slovakia's rejection of the bail-out fund and aggressively maintained momentum towards a new deal to both prevent a Greek default and to provide a protection mechanism for the region's banks. The political divisiveness that the issue has provoked is clear from the fact that the EU leaders summit, originally scheduled for today, has been postponed until next Sunday to allow more time to construct a comprehensive deal. 

This week investors will again remain very sensitive to newsflow from Europe, the US macro data and 3rd Qtr numbers from the big Wall Street banks. Over the next several weeks the key events will be;

• Chinese September macro report October 18
• EU Leaders summit on October 23rd
• US Fed FOMC meeting on November 1 & 2
• G20 Summit on November 3 & 4

To access the full report, click Download Russia Week Oct 17