Emerging stocks are not much in favour these days — Bank of America/Merrill Lynch’s survey of global fund managers finds that in August just a net 18 percent of investors were overweight emerging markets, among the lowest since 2001. Within the sector though, there are some outright winners and quite a few losers. Russian stocks are back in favour, the survey found, with a whopping 92 percent of fund managers overweight. Allocations to Russia doubled from last month (possibly at the expense of South African where underweight positions are now at 100 percent, making it the most unloved market of all) See below for graphic:
BofA points out its analyst Michael Harris recently turned bullish on Russian stocks advising clients to go for a “Big Overweight” on a market that he reckons is best positioned to benefit from the recovery in global growth.
Russia may not be anyone’s favourite market but in a world with plenty of cyclical headwinds, Russia looks a clear place for relative outperformance with upside risk if markets turn… we are overweight the entire market as we like domestic Russia, oil policy changes and beaten-up metals’ leverage to any global uplift.
Call it a contrarian trade but clearly now Russia has actually become everyone’s favourite market. The Moscow stock market is up more than 8 percent so far in September, its best monthly performance in two years. Oil has helped of course — Brent crude prices rose around $117 a barrel at one point and still remain well over $100 a barrel. Another inducement is valuations — on a price-book basis Russia trades at 0.7 times, a a 50 percent discount to its own 10-year average and the cheapest of all big emerging markets. Such low prices surely take into account any looming upheavals.
Another plus. For most emerging markets, the big fear is rising U.S. Treasury yields as the Fed starts to cut off liquidity. But BofA has compiled a list of 30 companies in emerging Europe, Middle east and Africa whose shares are positively correlated with Treasury yields — in other words, companies that benefit most from a recovering U.S. economy. Fifteen of the companies on that list are in Russia and that’s why, Harris points out, Russian equities tend to outperform following a spike in U.S. yields. His graphic above is a good illustration.