bne IntelliNews – Russian equity market bounces on easing geopolitical tensions and economic recovery


US President Joe Biden and Russian President Vladimir Putin are meeting today in a palace on the shores of Lake Geneva to try to find common ground and stabilize the strained relations between the United States and Russia.

However, even before their arrival, the mere suggestion that the two leaders could meet and try to come to an agreement caused a big rally in the Russian stock market as the geopolitical tensions that weighed on the stock market melted like snow under. the summer sun. .

An oil price shock and the global coronavirus pandemic (COVID-19) that rocked the global economy in 2020 are also on the decline, adding a tailwind to rising valuations. The conditions for investors are becoming more and more favorable day by day.

After being capped between 900 and 1,300 for about five years, the Russian dollar-denominated Russian Trading System (RTS) index has risen more than 20% this year and is poised to cross the 1,700 mark – a level he hasn’t seen since March. 2012.

The RTS index is already up 22% to 1,687 as of June 15, making it one of the best performing markets in the world. In this context, bank stocks have been the stars, with a return of 51% since the beginning of the year, and have recovered since the end of last year. More recently, the oil and gas sector and metallurgical and mining stocks have joined the party and have also started to recover strongly on the back of a sustained rally in the prices of oil, gas and major metals: the oil sector. and gas is up 23% and metals and mining are up 22% respectively over the same period.

This year’s rebound is not entirely unexpected, as bne IntelliNews reported in a December cover story “Brighter Days Ahead”. What is unexpected is the strength of the recovery and the effect on the stock market; Russia’s stock market is at its highest level in eight years and analysts believe it could continue to recover for another year.

The most obvious change is the rapid disappearance of geopolitical tensions, which have seen a proverbial roller coaster this year.

Tensions skyrocketed when Russia stepped up its troops on the Ukrainian border in April, but this episode culminated with a one-on-one summit in Geneva between US President Joe Biden and Russian President Vladimir Putin to begin. to solve their many problems.

“The market loves it because the risk premiums are going down,” says Slava Smolyaninov, head of strategy at BSC GM, in an exclusive interview with bne IntelliNews. “Only two months ago we passed from a possible open military clash on the Ukrainian border as Russia massed its troops in a move that was watched by the whole world. From there we are now [watching] a potential attempt [by] the United States and Russia to understand each other and sort out some of the problems that have built up between them over the years. “

Smolyaninov says the risk of war is a “big deal” for emerging market (EM) investors, but that he is now particularly encouraged, as it was the US side that called for the Geneva summit meeting and he there seems to be a genuine interest in dealing with the extremely poor relations on both sides.

More generally, there seems to be a stock market rally associated with the change of US president. Smolyaninov says he rethought preparations for Putin’s first meeting with US President Donald Trump, where the Russian market recovered sharply, outperforming other emerging markets by 10%. However, the pride did not last as Trump began to collapse like a bull in a china shop and the RTS fell back into the limited trade it had held since the last oil shock and the sanctions regime. induced by the Crimea was imposed in 2014.

That started to change in 2019, when the Russian economy finally began to emerge from a deep recession after the 2014 crisis and finally broke its range. The prospect of a Biden win has also pushed prices higher, but as the chart clearly shows, the 2020 annus horribilis took the index back to new lows for six years.

But like Trump, Biden’s inauguration appears to have sparked yet another ‘new president’ rally, as investors are once again hoping that a new start is possible – and this time around, it seems their hopes are a little more justified.

The difference between the first year of the Trump presidency and now is that the Russian economy was still stuck in a deep recession in 2016 and so after the initial optimism wore off the market returned to its fork. . It wasn’t until 2019, when the economy finally started to emerge from recession, that the market started to recover.

With Biden, the “new president” rally has been much stronger, as he has the resumption of economic growth that was already apparent in 2019 and additionally has the tailwind of the post-crisis rebound that always follows a great crisis. A year of pent-up demand is released as the pandemic comes to an end. This has sparked a commodities boom that is fueled by growing demand, which has been broadly synchronized by the pandemic: everyone is getting to the same recovery at the same time.


The second driving force behind the market is the reinflation of the global economy after a double whammy in 2020: the fall in the price of oil in March after the collapse of the OPEC + production agreement when Russia withdrew from the talks , and the coronavirus (COVID-19) which struck about a month later.

“From the beginning of May to mid-June, there was a reinflation which caused the ruble and the market to rise,” explains Smolyaninov.

At the start of this year, the virus has yet to be defeated by new vaccines, but economies around the world – including Russia – have rebounded much stronger than analysts expected – and they were already expecting a post-pandemic recovery.

“The [Production Manufacturing Index] in Europe and the rest of the world is already quite high, exceeding already high expectations, ”says Smolyaninov. “This, combined with very high material prices, even higher than before, works perfectly for a commodity-driven market like Russia’s.”

The Russian economy returned to growth in March, expanding 0.5%, and momentum has gathered since.

Banks led the charge throughout the year and easily outperformed the rest of the market. Investors see banks as an indicator of a general economic recovery and they tend to do well when the economy is doing well, but this year they have done particularly well.

Currently, Russian banks are recording their best profits in five years and with economic growth their profits are supercharged as they have started releasing provisioned capital for bad debts as the levels of non-performing loans (NLP ) that they have contracted pounds for years are resolved.

“All the banks have mobilized,” says Smolyaninov. “It’s a high beta business: banks suffer when the economy is bad and there are financial difficulties. But over the past two or three months, the banks have done very well. No one expected the reserves that VTB released. It was a huge jump in profits. And it all went through its P&L where investors can see it. “

Bank stocks have experienced very sharp swings in recent years. TCS Holdings, which owns Tinkoff Bank, Russia’s only purely online bank, went public at $ 17.50 in 2013 only to see its share price drop below $ 1 the following year after the annexation of Crimea by Russia. When the Russian economy started to recover in 2017-18, the stock fell back to $ 16, then broke above $ 20 in the 2019 rally and managed to hold its valuation for most of 2020. Currently , it is trading at an incredible $ 79.5 as of June 14 with a price / earnings (p / e) ratio above 22x.

Metals, oil and gas have been a bit slower to recover, but all major commodity prices are now at multi-year highs and things like copper prices are currencies at historic highs.

“Who would have thought at the start of the year that oil would cost more than $ 70 a barrel, steel at ten-year highs and things like copper at historic highs?” Smolyaninov asks.

Will it last? The Russian stock market has been dying for half a decade. The local debt market has garnered a lot of attention, but stocks fell off the radar in 2014 and have been largely ignored since then. What has changed is the imposition of sanctions, the history of which has shown that it usually takes decades to remove, if not more.

Analysts and investors are now scrambling to catch up with the rapid gains recorded to date. In the short term, the rally is likely to continue simply because Russian stocks are paying the best dividend yields in the world and have been for several years now.

“In this market with this rate of the ruble against the dollar, Russian companies are making a lot of profits which will be paid out in the form of dividends by next summer,” Smolyaninov said. “Given that we live in a zero interest rate world and you can earn 6-7% just on dividends, the Russian market looks very attractive.”

Bankers had a fair price outlook for the RTS for this year of around 1,700, but that target appears to be met as early as next week. GDP growth targets have also been revised several times following the good economic news. The RTS target is already overdue for an upgrade.

Looking further down the road, the outlook is less clear. Despite all the good news, inflation and stagnant real incomes remain thorny issues that will not be resolved easily or quickly. In addition, structural problems remain: the fixed investment needed to fuel long-term systemic growth is below normal, without which the Russian economy cannot reach its full potential. While there are many good corporate stories, without deep and broad structural reforms and without significant increases in investment, the history of equity appreciation will remain capped.


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