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Investment Outlook 3Q 2015 Update

Jul 31, 2015

Investment Summary


  • DM economies stay on recovery track. Economic conditions have improved in North America and EMEA, while deteriorating in Asia (excluding Japan) over the last few months.
  • G-4 central banks maintain economic stimulus. The ECB and BOJ will continue their quantitative easing programs. The US Fed’s tightening will be gradual and probably not start until 2016.
  • EM economies continue to decelerate due to both cyclical and structural reasons. We think the DM recovery will eventually boost EM economies, which will lend support to commodity prices.
  • In Russia the most likely scenario for the next 12 months is a mild recession with real GDP contracting 2-3%, oil prices fluctuating between $50 to $60/bbl, inflation and policy rates declining to less than 10%, and the ruble at 55-60/USD.
  • External debt deleveraging remains a key risk for broad economic growth, but it is rebuilding balance sheet quality. This process may continue throughout 2015-16 in the amount of $40-60 bln per annum, or 3-4% of GDP.
  • The CBR’s goal of rebuilding reserves to $500bn over the next 5-7 years is likely to be neutral for ruble liquidity (as the regulator could neutralize currency purchases with repo transactions) and moderately negative for the ruble exchange rate. We estimate that the CBR will reduce the key rate to 9% over the next 12 months.
  • Our top-down and bottom-up DCF models indicate equity upsides of 40% and 30%, respectively. The multiple expansion phase of the market recovery has started with forward 12m P/Es breaking above 6x. Russian equities have a very low EPS base and multiples are depressed by geopolitical factors.
  • Our equity portfolios are defensively positioned in liquid names, focused on value in exporters and growth in selective domestic consumption plays.
  • Our fixed income strategies are positioned for a moderate yield compression. Our ruble strategy is currently above the benchmark duration, yielding 13.1% to maturity. Our hard currency strategies are more focused on credit specific stories with an average YTM of 10.5%, suggesting a more than 900 bps spread over the benchmark.

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