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Investment Outlook Second Quarter 2016 Update

May 13, 2016

Investment Summary


  • We see turning points in 2016. The USD, EMFX, Commodities, EM/DM relative performance may all see their trends reverse. We think the FX adjustment will lead to a boost in commodity prices, supporting EM economies.
  • DM economies remain in a low growth secular stagnation as G-4 central banks maintain economic stimulus. The ECB and BOJ will continue their QE programs throughout 2016. The US Fed’s tightening is likely to be gradual.
  • In Russia the most likely scenario for 2016 is continued stagnation with a 0.5% decline in GDP, assuming an average oil price of $45/bbl for the year. We have upgraded our macro forecasts for 2016 after better than expected numbers were released by Rosstat for the first two months of the year.
  • Russian inflation has declined to 7.3% in March 2016 due to global disinflationary factors, a high base effect, tight monetary policy at the CBR and ruble strength. Rate cuts are expected and should be supportive both for Russian equities and RUB fixed income.
  • The government budget deficit (approximately −3%) will be filled by the sovereign wealth fund, privatization proceeds and higher dividends from SOEs. Privatization plans have been is accelerated with a $15 bln target. An increase in the dividend payout ratio of SOEs from 25% to 50% will provide another $6 bln to fill the 2016 budget gap.
  • Our top-down and bottom-up DCF models indicate 25-35% equity market returns for 2016. The forward 12m RTS Index P/E ratio is now breaking through the 6.5x level. Russian equities have a very low EPS base and multiples are depressed by geopolitical tensions.
  • Our equity portfolios are positioned mostly in liquid names, focused on value in exporters and growth in select domestic stocks. High dividend yields and strong balance sheets are also factors in our stock selection.
  • In the FI hard currency space we see further spread compression. We prefer 4-5-year duration BB/BBB Russian credits that managed to maintain strong balance sheets, benefit from a scarcity of supply, as well as better credit quality. We estimate total returns at over 10% in USD terms for these bonds in 2016.
  • In the ruble bond universe we expect interest rates to drift down and the government curve to hold flat. The ongoing disinflation trend supports expectations for further key rate cuts of 150-250bps in 2016. We expect total returns to exceed 11.5% in ruble terms for these bonds.

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