Business World

Tuesday 20 February 2018

Russian stock market may manage 21pc rise over the next year

Vladimir Putin is still playing a long game
Vladimir Putin is still playing a long game

Elena Popin

Russia's benchmark stock gauge, one of the most volatile in the world, may rise 21pc over the next year in dollar terms as valuations already reflect the worst of the country's economic crisis, according to BCS Financial Group.

The RTS Index can advance to 930 in the next 12 months after tumbling 45pc in 2014 as a rout in oil and sanctions related to the Ukraine conflict weighed on the Russian economy. The dollar-denominated benchmark has declined this year by 2.7pc.

While the world's largest energy exporter entered its first recession since 2009 earlier this year, equity prices already reflect the factors hindering the economy, according to BCS, which was named Russia's third-best brokerage firm in 2015 in an Extel survey.

The firm still maintains a neutral recommendation on Russian stocks amid lingering concern that corporate earnings will be hurt by the slump in gross domestic product, which will prevent the index from rebounding at the same pace as after the crises of 1998 and 2008.

"Now that all the negativity related to the fact that Russia is entering a recession as oil prices are sinking are priced in, there is a potential to see the beaten down RTS Index rebound under a base-case scenario," Slava Smolyaninov, an equity strategist at BCS, said. "Even so, the risk that the economic slump will persist is still there, and the risk that the index will head down exists."

Russia's gross domestic product shrank in each of the past two quarters and is forecast to contract 3.7pc this year, according to the median estimate of 41 economists surveyed by Bloomberg. Aggregate earnings for companies in the index fell 27pc in the second quarter, and the third quarter should also be weak because of a declining ruble and low oil prices, according to BCS.

The RTS Index has been trading at an average of 800 since August, a signal to Smolyaninov that traders are pricing in a 70pc probability of a deep and prolonged recession, with a 5pc economic contraction or more.

Russia will exit the recession in the first half of 2016, and the firm expects valuation multiples to start increasing four to six months prior to that.

The potential 21pc increase for the index is the sum of all the stock target prices in the index. This is a relatively small advance based on historical precedents. After the crises of 1998 and 2008, the gauge rebounded by at least 30pc. This time such an advance is unlikely as the economic recovery will be muted.

"Russia is in a recession, and there is a risk that it will become a prolonged one," Smolyaninov said.

Brent crude, the benchmark used to price the country's exports, is still down 58pc from last year's high. The ruble gained slightly against the dollar last week but the currency is the second-worst performer among developing peers this quarter after Brazil's real.


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