Clinging to hope in bear-bitten Russia
Poor Russia. After spending six months as the world’s best performing emerging market, the Moscow bourse has been the big loser of this month’s rout – year-to-date returns of over 10 percent until mid-July have since dissolved in a sea of red, with a plunge of over 20 percent since the start of August. As oil prices fell and the outlook for U.S. and European growth darkened, overweight positions in Russia halved versus July, a survey by Bank of America/Merrill Lynch showed this week.
But get this — Russia remains among investors’ main emerging market punts and only Indonesia is more favoured, according to the BoA/ML poll. The reason is that fund managers are still clinging to hopes that an increasingly wealthy Russian consumer will save the day. Unfortunately those hopes are yet to materialise. Returns on domestic demand-based stocks such as Sberbank, carmaker Avtovaz and supermarket chain Magnit have been even more disappointing this year than the broader Moscow market.
Even the staunchest Russia bull will have been disappointed with data showing Russia’s economy grew at just 3.4 percent in the second quarter of the year. That proves the economy was running out of steam even before the August oil price fall and suggests that the Russian consumer is not yet stepping up to the mark. Retail data since then have been more heartening — annual sales rose 5.6 percent in July from 3 percent in June.
So which way could Russia go? Some like Russian investment house Aton say another 20-25 percent stock market drop cannot be ruled out if the global economy goes into a tailspin. That sounds overly pessimistic – - as UBS analysts point out the global macro backdrop and the oil price outlook do not look nearly as bad as 2008. Chinese growth too is holding up well.
Three things are in Russia’s favour. One is that prices for oil, the mainstay of the Russian economy, remain over $100 a barrel – that should allow the government to keep spending ahead of elections. Second, most other emerging markets look uglier. Stocks in fellow-BRIC India may have fared better during the August selloff but the picture is far from rosy. Growth is slowing, as testified by factory expansion that fell for the third straight month in July and car sales that are down for the first time in over two years. The central bank remains uber-hawkish. Little surprise then that the BoA survey showed India to be investors’ least favoured market.
The clincher could be valuations. Russian stocks, always cheap, are even cheaper after the selloff, trading at just 5 times forward earnings — almost half the emerging markets average. For that reason, John Lomax, HSBC‘s chief emerging equity strategist reckons the current market dip is a buying opportunity. The market will recover if fears of a U.S. double-dip recession prove unfounded, he says.