Art of investments


Investment Outlook 2016

Feb 9, 2016

Investment Summary

  • Over the next six to twelve months we see several major global turning points in: rates, currencies, commodities, and ultimately in EM/DM relative market performance. Commodity prices have declined with over-supply funded by years of ZIRP, which is now coming to an end. USD strength (the currency in which commodities are priced) and local currency weakness have also contributed, but this will revert.

  • DM economies remain on a low growth recovery track as G-4 central banks maintain economic stimulus. The ECB and BOJ will continue their QE programs throughout 2016. The US Fed’s tightening is likely to be gradual.

  • EM economies have decelerated for both cyclical and structural reasons. We think the DM recovery and FX adjustment will boost EM economies, which will lend support to commodity prices.

  • In Russia the most likely scenario for 2016 is continued stagnation, based on oil prices fluctuating at $30-50/bbl. Inflation and policy rates are likely to trend marginally lower, and the ruble looks fairly valued at current oil prices.

  • External debt deleveraging remains a key risk for broad economic growth, but it is rebuilding balance sheet quality. This process may continue in 2016 in the amount of $40-60 bln, or 3-4% of GDP.

  • Both our top-down and bottom-up DCF models indicate 20-30% equity upside. The multiple expansion phase of the market recovery has come to an end, but the forward 12m RTS Index P/E ratio has so far failed to consolidate above the 6.0x ceiling seen over the last five-year period. Russian equities have a very low EPS base and multiples are depressed by geopolitical tensions.

  • Our equity portfolios are defensively positioned in liquid names, focused on value in exporters and growth in select domestic plays.

  • In the FI hard currency space we like to play on further spread compression. We prefer 4-5-year duration BB/BBB Russian credits that managed to maintain strong balance sheets over the last 2 years, have healthy local demand and benefit from a scarcity of supply as well as better credit quality relative to other EMs.

  • In FI ruble universe we expect interest rates to drift down and the government curve to hold flat. The ongoing disinflation trend supports expectations for further key rate cuts and this situation will continue through 2016.

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