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Investment Outlook 2Q 2013

Apr 16, 2013

Investment Summary


  • Global economic cycle conditions have clearly improved over the previous 6 months. The Global PMI index has entered an expansionary zone. Revised economic growth and inflation consensus forecasts took a turn for the better. The G10 Economic Surprise Index has significantly improved.
  • Central bank quantitative easing (QE) efforts over the last 6 months have helped to generate positive momentum for industrial production and inflation. Inflationary expectations continue to rise in the US as the Fed continues its aggressive asset purchase program as of January 2013. The ECB's quantitative easing capacity may be extended in 2013.
  • Global uncertainties keep investors ‘parked’ in defensive assets, which, in the current environment, are guaranteed to slowly destruct wealth in real terms. US bond funds have accumulated roughly $1 trillion in ‘excessive’ investments, which were made at the expense of investments in risky assets (primarily equity). The ‘Great Rotation’ theme is trending, however, it is still premature to call for a wholesale rotation from fixed income into equities.
  • We see a strong case for the Central Bank of Russia to ease monetary policy. From a monetary supply standpoint, all the prerequisites for inflation deceleration are in place on a 12-16 month horizon. The Central Bank of Russian has room to lower interest rates by 50-100 bps over the next 12 months. This may lead to a 25-95 bps reduction in OFZ YTMs. Local high-grade corporate spreads to OFZs could contract 80-110 bps. Local high-yield corporate bond spreads to OFZs could contract 170-220 bps.
  • We maintain a selective stance towards Russian Eurobonds. We prefer the high-yield corporate segment under a low inflationary scenario.
  • The scenario-weighted upside for the RTS index is +55% according to our estimates. Dividends and share buy-backs remain key forces that should unlock fundamental value. Following a strong rally on the fixed income side, risk appetite will likely spread to equities. Russian equities should more than double in order to close the accumulated 5 year performance gap with fixed income.

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