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Investment Outlook 2Q 2014 Update

Apr 14, 2014

Investment Summary


  • DM economies stay within the low-inflationary growth environment. GDP growth numbers are being revised up while inflation forecasts continue to trend down. EM economies are still struggling – economic surprise indices look worse compared to DMs, forecast revision momentum remains negative.
  • G-4 central banks are keeping the accommodative policy stance. The Fed is gradually tapering the asset purchase program with the first rate hike expected in 2015. BRICS’ central banks raise interest rates to defend currencies.
  • Rising geopolitical tensions due to Crimea / Ukraine developments demand a higher risk premium for Russian assets. Equities and local money market rates were hit the most.
  • Deeply discounted asset prices have triggered interest from distressed and contrarian investors. Trading volumes rose 2-3 times compared to February levels, a significant rotation of the investor base is seen in many segments / names. Russian equities have seen USD 589mn of inflows through all fund categories since the beginning of March.
  • The Russian economy continues to cool down with the growth of key macro indicators decelerating. The cyclical improvement in developed market economies is likely to support growth in 2014.
  • CBR unexpectedly hiked the key rate by 150bps in March. FX interventions were also increased. The purpose of the tightening was to dampen capital outflows and prevent excessive ruble weakening in the wake of developments in Ukraine.
  • Local bonds are likely to deliver more than 9% returns over the next 12 months in both government and corporate segments under a low-inflationary scenario.
  • We expect Russian Eurobond returns within 4-11% range in USD over the next 12 months  depending on the macro scenario.
  • The top-down scenario-weighted upside for the RTS index is more than 60% according to our estimates.  Market cap weighted aggregate upside to our DCF estimated fair values provides more than 60% upside in 2014. Dividends and share buy-backs remain the key forces for unlocking fundamental value in the short term. Higher corporate efficiency, less corruption and lower political risk remain the long term drivers. Russian equities must more than double in order to close the accumulated five-year performance gap with fixed income. Double-digit EPS growth is quite realistic in certain cyclical sectors and export oriented sectors will benefit from the weaker ruble.

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

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