Investment Outlook Third Quarter 2020 Update

Investment Summary

• The first stage of market recovery from the collapse and bottom reached in Q1 has played out. A further market rally requires economic growth and earnings to get back close to 2019 levels, although  this is uncertain.
• Yields in the developed world are close to zero, while equity valuation multiples look quite demanding;
• We see a 20% probability of a significant second leg of economic contraction due to a second wave of COVID-19 case growth in Russia, see our Bear Case Scenario on slide 9;
• In our Base Case Scenario, we expect Brent crude oil prices to average USD 40/bbl in 2H20 and USD 45/bbl in 2021.  We believe the OPEC+ agreement and reduced global energy sector investment, combined with a recovery in demand as of 3Q20, might create a deficit of 3-4 mbpd in 2H20. The probable deficit in 2021 is 1.5 mbpd.

Investment Preferences

• We turn Neutral (down from OW) on Russian equities, UW Russian hard-currency debt (down from EW), OW GEM Debt and Neutral (up from UW) on RUB debt;
• We Like Retail, Real Estate and Precious Metals within Russian equities;
• We are Neutral on Oils, Base Metals, Banking, Telecoms and Utilities;
• We prefer to be Underweight Gas names in the current environment.