Art of investments


Investment Outlook 2020

Feb 5, 2020

Investment Summary

  • Global recessionary risks are fading. According to Bloomberg polls, from November 2019 the probability of a global recession within the next 12 months decreased by more than 3 pp and sits around 22%. The decline in the probability of a global recession is mainly due to synchronized monetary policy softening by key Central Banks, an increase in the likeliness of a controlled Brexit (instead of a hard Brexit), and progressive steps taken to resolve the trade dispute between the USA and China. However, we believe that this has been largely priced in after 2019 rally in risk assets. We take a more cautious approach to risk assets in 2020 taking into account demanding valuations (especially in credit and US equities) and escalating short-term risks.
  • Coronavirus is a big new unknown. Due to the exponential nature of virus progression it is very hard to predict the final impact at the early stage. If the disease continues to affect more cities in China, consumption could fall and GDP growth could drop to 2-3%.
  • We are keeping our 2020 oil price projections at 55/65/75 in the bear / base / bull case scenarios, respectively. On a probability-weighted basis for 2020 we expect real GDP at 1.8% YoY, headline inflation at 3.9% YoY, key rate at 5.75% eop with USDRUB exchange rate at 64 eop. However, increases in social spending, which are currently being discussed by the newly reformed Russian Government, may accelerate Russia’s GDP growth to 2.0-2.5%, while simultaneously having some inflationary impact. Along with this, the CBR recognized that inflation may dip significantly below the target level of 4% in 1Q20, however they consider this a one-off due to higher VAT in 2019.
  • Monetary policy is becoming more accommodative. The Central Bank of Russia (CBR) continues to say that the neutral level for the key rate remains at 6-7%. Despite the CBR’s moderate comments following their latest meeting, in light of the latest changes in government further monetary policy easing and more active key rate cuts designed to stimulate economic growth cannot be ruled out. We revised our key rate forecast and expect that it may shift to 5.5-6.0% by YE 2020, depending on the scenario.
  • The OFZ yield curve has already priced in 3 more CBR rate cuts (down to 5.5%). The OFZ 1-15Y slope has normalized at ca. 80-110 bps. The OFZ yield curve may adjust depending on expectations of further CBR policy easing, and government bonds with maturity of +5 years may be most vulnerable. Therefore, it is most appropriate to be positioned in shorter OFZs (2Y-3Y) in case CBR policy easing ceases. Top quality BB+/BBB- rated corporate bonds with 2-3 year maturity are still preferable, since credit spreads are close to their historical average, while HY bond spreads look tight.
  • Russian Eurobonds to deliver low single-digit total returns over the next 12-months. The Fed’s monetary policy pause (after 3 cuts amounting to 75 bps in 2019) and the recent rise CPI expectations in the US triggered a revision in our estimates for the USD interest rate trajectory. We set our 10Y UST yield expectations at 1.6% in the 12M base-case, which implies expected total return of GEM Eurobonds at 4-5% for the next 12 months, depending on the segment.
  • Russian equities could still deliver double-digit returns over the next 12 months. As the market rallied, EPS estimates and payout ratios were revised up as well and the risk premium is still there. Russia’s sovereign bond yields just made fresh lows while the dividend yield is still close to historical highs. Russia is not yet at the top of the corporate profits cycle, SOE payouts have some more upside in select names, leverage is low and declining. With high implied cost of equity, companies are likely to put equity issuance on hold and opt for dividends and buybacks.
  • We prefer RUB debt and domestic plays in equities to Eurobonds among Russian asset classes. Local rates are likely to trend down over the next 12 months while USD rates may bounce up from historical lows. We expect Russian equities to continue outperforming Eurobonds as long as EPS estimates trend up.


Full version of the report could be found attached.

icon_pdf.gif   Full version of the report could be found attached.

Back to the list

All rights reserved © 2022
VTB Capital Investment Management