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Investment Outlook 4Q 2015 Update

Oct 23, 2015

Investment Summary


  • DM economies stay on recovery track as G-4 central banks maintain economic stimulus. The ECB and BOJ will continue their quantitative easing programs. The US Fed’s tightening is likely to be gradual.
  • 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.
  • Over the next six to twelve months we see several turning points in the major global factors that have hurt emerging markets over the last few years.  Commodity prices, rates, EM/DM relative value may all see turning points.
  • In Russia the most likely scenario for 2016 is a stabilization in output and demand, based on oil prices fluctuating at $50-60/bbl. Inflation and policy rates are likely to trend below 9%, and the ruble looks slightly undervalued.
  • 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.
  • Both our top-down and bottom-up DCF models indicate 20%-30% equity upside. The multiple expansion phase of the market recovery has come to an end, but the forward 12m RTS Index P/E ratio has so far failed to consolidate above the 6.0x ceiling seen over the last five-year period. 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 select domestic plays.
  • In FI hard currency space we like to play further spread compression. We prefer 4-7 years duration BB/BBB Russian credits that managed to keep strong balance sheets over the last 2 years, have healthy local demand and benefit from scarcity of supply as well as better credit quality relative to other EMs.
  • In FI ruble universe we expect interest rates drifting down and the government curve staying flat. The ongoing disinflation trend supports expectations for further key rate cuts and this situation will continue through 2016; the best instrument to play this idea on risk/reward basis is OFZs with duration of 4-10 years.

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

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