Art of investments


Investment Outlook Third Quarter 2016 Update

Jul 25, 2016

Investment Summary

  • Global economy is muddling through with commodities and EMs bottoming out. World’s major central banks continue to pursue accommodative policies. The US Fed’s tightening is likely to be gradual and economic data-dependent. Increased global economic uncertainty due to Brexit event makes monetary policy normalization perspectives more remote.
  • Russia is set to see an improvement in economic conditions. Recent data on economic activity was better than market expectations. Markets forecasts for 2016-17 are now being upgraded. Our base case scenario for 2017 implies 1.5% real GDP growth and declining inflation assuming average oil price of $55/bbl. 
  • The disinflationary trend continues. Inflation continues to slow faster than market expects. The CBR is gradually reducing inflation expectations and expects it to fall below 5% YoY over the next 12 months. We expect CPI to reach 7.5% YoY and possibly slow down to 6.5% YoY over the next 12 months.
  • The government budget deficit (approximately -3%) will be funded 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 23-28% equity market returns over the next 12 months. Key points underpinning Russia’s investment case are EPS recovery from a very low base and eventual re-rating in multiples as geopolitical tensions subside and SOEs increase dividend payouts. We see ~15% EPS CAGR for 2016-18 assuming gradual recovery in Brent to $60/bbl by 2018.
  • Spread compression in hard currency FI space may continue. We maintain our focus on solid credit stroies. 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. 
  • Over the next 12 months we expect the OFZ curve to gradually flatten as a result of short-term rates going down. If the disinflation trend continues over 2016-17 the OFZ curve could normalize in 1-2 years. Throughout 2H16 BoR expects that banks will shift from deficit to surplus of ruble liquidity which is highly supportive for RUB bonds. CBR key rate could be reduced by 250 bps over the next 12 months from 10.5% to 8%.

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

Back to the list

All rights reserved © 2021
VTB Capital Investment Management