Art of investments


Investment Outlook 4Q 2014 Update

Oct 31, 2014

Investment Summary

  • Global economy is likely to move closer to its potential output level in 2015. 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. 
  • Russia: geopolitical tensions flared up again in August. Equities, the ruble and money markets have suffered considerably. The latter also due to the CBR’s tight monetary policy and weak oil prices. Recent events seem to indicate that a political resolution to the Ukraine crisis is slowly progressing, which could help Russian assets to close their geopolitical discount.
  • Russian economy is still bottoming out on key macro indicators. We expect fixed assets investments to decline 3% YoY in 2014, inflation to rise to 7.7% YoY on the back of higher food prices, and real wage growth to slow to 3% YoY. A cyclical improvement in developed economies could support oil prices and the Russian economy in 2015.
  • Ruble bonds could produce a double-digit expected total return over the next 12 months. A present the ruble yield curve has a flat shape with 10Y OFZ yields exceeding 1Y yields by less than 100 bps. We expect the yield curve slope in terms of the 10Y-1Y spread to normalize at around 180 bps on a 12m horizon. We see the 10Y yield going down ~50bps and the steepening of the yield curve is most likely to be achieved by short-term rates going down 130bps.
  • Depending on macro scenarios Russian Eurobonds could deliver a  total return of 7-12% over the next 12 months in USD terms.
  • The top-down scenario-weighted upside for the RTS index is around 50% 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 could be found attached.

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