Research Notes
Tactics – June 2009 Cash vs Fear
| 04.06.09 |
Spring rally. The RTS index has doubled since early March, outperforming BRIC and DM stock indices, even though the bulk of EM fund inflows went to Asia and Latin America, by-passing Russia.
Money market positive trends. Upbeat trends on commodity markets have spilled over into the Russian money market. The stoppage of capital outflows in April-May has led to the stabilization of Central Bank reserves and the strengthening of the ruble against the EUR-USD currency basket by 11% from its February low. The easing of inflationary pressure, due to the weakening effect of ruble devaluation, has allowed the Central Bank to lower its base rate from 13% to 12% and begin to apply classic instruments to stimulate economic growth.
Real economy remains under pressure. The real economy continues to experience sluggish demand and a shortage of debt financing. In April, Russia’s industrial production and GDP contracted the most so far this year, by 10.5% and 16.9%, respectively. The unemployment rate exceeded 10%, having risen 60% above its pre-crisis level. Based on the latest data, we have lowered our outlook for the pace of economic revival in Russia and GDP contraction in 2009. We now project GDP to fall 7.0% this year.
Fundamentally, correction would be logical... The RTS index is now 25% above our year-end 2009 target of 930 points (under our baseline scenario), while the stock market’s P/E 2010 ratio is approaching 12. So, even if oil prices stay in the USD 60-70 per barrel range, a potential correction would be logical in fundamental terms.
... but the threat of global inflation stimulates cash inflows. Measures taken mainly by monetary authorities in developed countries to revive economic growth may strongly increase inflationary pressure in two-to-three years time, and the choice of inflation-hedging instruments is not really wide: mainly commodities and stocks. The Russian stock market is one of the most appealing as a hedge against global inflationary trends, given its strong commodity relationship.
We recommend focusing on special situations. If market conditions remain stable, we expect a rise in investor’s risk appetite. So the market may continue to shift from ‘expensive’ blue chip shares to strong second-tier shares, some of which still have a triple-digit upside potential.
Fixed income. Following the sharp decrease in Russia’s sovereign risk, first-tier bond yields have fallen considerably. In these conditions, we recommend investing in Eurobonds maturing in 2010-2011 as their specific risks are still highly valued by the market. We single out ÒÌÊ 11 and Russian Standard Bank 10-1, 10-2 and 11.
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