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Investment Outlook 3Q 2014 Update

Jul 18, 2014

Investment Summary


  • Growth rates for the global economy are still below their potential level. The economic cycle in developed markets still looks better than in emerging markets, but in 1H14 there were the first signs of a turnaround. The economic surprise index for EMs has significantly improved relative to DMs. The differences in economic growth and inflation between EMs and DMs are no longer contracting.
  • G-4 central banks maintain their economic stimulus policies. The first hike in interest rates is expected no earlier than in 2015. The US Fed is gradually tapering its quantitative easing program and will probably raise interest rates in 2015.
  • Geopolitical concerns over the situation in Ukraine led to a significant discount in Russian assets, which peaked in March. Over the past few months the geopolitical discount has closed in equities and most debt market segments with the exception of ruble government bonds. Money market rates remain practically unchanged from March, which is a result of the CBR’s monetary policy.
  • Russian economy is through the bottom and we are seeing signs of a turnaround. As of 1Q14 there was a decline in investments to primary capital, an increase in inflation and a slowdown in real income. Furthermore, there has been indications of a turnaround – the slowdown in real GDP growth has halted, industrial output has increased and retail turnover growth has accelerated. On the whole we remain rather positive on the Russian economy in the short term, which is due to a cyclical improvement in developed economies.
  • In our low-inflation scenario the total return on investment for government and corporate ruble bonds exceeds 9% in ruble terms.
  • Russian Eurobonds could see a total return on investment of 2-8% in USD terms.
  • The top-down scenario-weighted upside for the RTS index is around 40% according to our estimates. Dividend payments and share buybacks continue to be the main support factors for equities.

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

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