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Investment Outlook 2015

Feb 19, 2015

Investment Summary


  • Russian assets face a perfect storm. The price of Brent has fallen from $100-120 to $40-60 over the last 12 months. Ruble has sold off, closely following Brent. Economic sanctions from the West led to an acceleration in capital flight and higher borrowing costs for Russian lenders. Russia 5Y CDS trades wider than EM peers, approximately at the B rating.
  • Floating RUB acts as an automatic stabilizer for the economy. A Brent price of $55/bbl and USDRUB at 65 results in a balanced government budget and a current account surplus of approximately 5%.
  • Russia’s external vulnerability is limited. Russia has a positive CA and moderate FX debt load on aggregate level. Corporate FX debt issuance since 2009 was quite moderate with external corporate debt relative to GDP showing only a minor increase. Russia had positive international net assets estimated by USD190 bln as of end-3Q14.
  • External debt deleveraging is a key risk. This process began in 2H14 and may continue throughout 2015-16 in the amount of $40-60 bln per annum, which sheds off 3-4 percentage points from GDP.
  • Global economy is likely to move closer to its potential output level in 2015. This could be achieved mostly by an acceleration in developed economies.
  • G-4 central banks maintain their economic stimulus policies. The US Fed is gradually tapering its quantitative easing program and may start raising interest rates in 2H15. The ECB has announced an expanded asset purchase program of €60 billion per month through September 2016.
  • Russian economy is likely to fall into a recession in 2015. We expect a GDP contraction in real terms of 0.6-4.2% YoY, depending on the oil price scenario ($40-$70/bbl Brent).
  • Scenario-weighted total return for ruble bonds over the next 12 months is estimated at 14% in local currency.
  • Corporate Eurobonds could deliver 20-30% returns in USD under our base and bull cases as credit spreads return to normal levels.
  • The top-down scenario-weighted upside for the RTS index is around 40% according to our estimates. The case for Russian equities now is based on a very low EPS base and multiples depressed by geopolitical tension.

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