Art of investments


Investment Outlook 4Q 2013 Strategy

Dec 10, 2013

Investment Summary

  • The economic cycle for developed economies has improved. The latest macro data for developed markets have significantly exceeded expectations, and forecasts for real GDP in 2014 are being revised up, while inflation forecasts are being downgraded
  • The US FOMC refrained from QE3 tapering at September’s meeting. We would like to highlight that current US economic conditions (inflation, unemployment) are still below the levels that would allow for a rapid withdrawal of monetary stimulus
  • The US debt ceiling debate is causing uncertainty. Politicians play a game of brinksmanship in budget negotiations that could lead to a technical default on part of its $16.5 trillion in debt and/or a government shutdown
  • Russia remains hostage to weak investor sentiment with respect to BRIC and EM equity markets in general. We expect this to reverse as global growth picks up in 2014
  • The Russian rouble has weakened versus USD as EM currencies were sold off, but quickly regained ground thanks to the oil price strength. We think that RUB is close to fair value versus USD. Our current scenario-weighted USDRUB forecast is 31.9 for end-2013 and 31.6 for end-2014
  • The CBR announced changes to its policy setting system at its meeting in September. The CBR’s key rates will now be repo and one-week deposit rates of 5.5%, with the refinancing rate taking a backseat until 2016
  • Rouble bond yields stabilized after May-June selloff as non-resident offers were met by domestic bids. 10Y OFZ real yield is close to its long-term average. Given the anticipated inflation deceleration in 4Q13 and beyond, we see long-term rouble yields roughly 70bp lower
  • The slope of Russian sovereign Eurobond yield curve has significantly steepened over the past 12 months. We see little room for 10Y UST yields to move above 3% as short-term rates are firmly anchored and yield curve steepness is near historical highs. Russian eurobonds with 3-5 year maturities look most attractive based on roll-down effect which could add 60-100bps to total return on a 12m horizon
  • Russia equities offer deep value as they are priced the cheapest of all GEMs. Russia’s discount to GEMs by forward 12m sector-adjusted P/E is approximately 30%.
  • The scenario-weighted upside for the RTS index is over 50% according to our estimates. Dividends and share buy-backs remain the key forces for unlocking fundamental value. Russian equities must more than double in order to close the accumulated five-year performance gap with fixed income. Given that consensus EPS expectations were significantly revised down since early 2011, double-digit EPS growth is quite realistic through a combination of low-base recovery in cyclical sectors and strong underlying growth in domestically-oriented sectors.

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