Russian equities have outperformed almost all other markets since mid-February, when the oil price hit a multi-year low. Russia has traditionally been seen as an ‘oil proxy’, because state-owned oil and gas majors dominate Moscow’s stock exchange. In the first half of this year, and indeed much of the time before that, Russian equities closely tracked the oil price.
But since July, we’ve seen a ‘decoupling’, which has been especially strong since Donald Trump got elected to the White House last month. The MICEX Index of course rallied on the back of OPEC’s decision to cut oil production on 30 November. But that rally had run its course after a few days. Since December 6, however, the index has risen by another 5%, and by more than 9% in dollar terms.
The starting point of that rally coincides with Exxon Mobil CEO Rex Tillerson first being mentioned as a candidate for the post of Secretary of State. Tillerson, who has close ties to Russian president Vladimir Putin and received Russia’s Order of Friendship in 2013, has been a vocal opponent of the economic sanctions that were imposed on Russia by the US and the EU for the country’s illegal occupation of Crimea. Banks and oil & gas companies have been hardest hit by these sanctions, as they depend to a large extent on foreign financing and investment. Exactly these companies have seen their share prices rise most since Tillerson’s candidacy emerged.
The prospect of a (partial) lifting of sanctions has played a role in the post-Trump rally, says Matthias Siller, Investment Director, EMEA Equities, at Barings. But it is just one of the forces that are combining to propel the performance of Russian equities. Indeed, the current rally can be traced back to before Donald Trump even secured the Republican presidential nomination.
“Russian equities are profiting from the global value rally. Valuations are no longer as low as at the start of the year, but Russian equities have been seriously undervalued, even taking the high cost of capital into account,” says Siller.
That’s another factor changing for the good. An easing of sanctions would do its bit to make access to finance easier for Russian companies, but the Russian central bank is also doing its part.
“Ms Nabiullina [the central bank Governor] is doing a fantastic job. Inflation is coming down towards 4.5% and the central bank is cutting rates at the same time. Sberbank, Russia’s largest bank, expects an additional 150 bps rate cut this year, on top of the 100 bps cut to 10% that we have already seen this year,” says Siller.
This could further drive the performance of Russian equities. And a change of focus of the Russian government in 2017 from involvement in military conflicts abroad to reforming the domestic economy could also support the asset class. “Expectations of economic reform are so low, that all surprise would be to the upside.”