Russian Equities Weekly 1-5 February, 2021: Inflation continues to accelerate

Russian equity market dynamics

Last week, the Russian equity market rose, but by less than the broader emerging market (EM) index.

The lag was mainly due to Russia-specific factors:  A court sentenced opposition leader A. Navalny to a prison term, which was followed by sanctions rhetoric from the EU and the US.

  Week YTD
MSCI Russia 10/40 TR in USD 4.0% 0.9%
MSCI EM index TR in USD 5.0% 8.2%
Excess return -1.0% -7.3%
Due to Russia specific factors* -0.9% -2.5%
Due to difference in sector structure* -0.1% -4.8%
Key commodities**
Oil 8.2% 16.0%
Gold -3.3% -4.5%
FX
RUB/USD 1.7% -0.8%
RUB/EUR 1.8% 0.0%
* See details of methodology in the end of the report

** Energy weight in the MSCI Russia 10/40 is 36%, Gold producers weight in the index is 9% (weights are as at the end of January 2021)

Data as of 5 February 2021

TKB Investment Partners (JSC) calculations; Bloomberg

  Current
Upside/downside to fair price 7%
Data as of 5 February 2021
TKB Investment Partners (JSC) calculations

Main Russian news

Inflation accelerated in January to 5.2% YoY. The consumer price index (CPI) rose in all three main segments. Food inflation rose to 7.0% YoY from 6.7% at the end of December, while non-food inflation rose to 5.1% YoY from 4.8%. Inflation in the services segment rose to 2.8% from 2.7% at the end of December. The Ministry of Economic Development said that the increase in inflation was due to higher goods prices in the global market where prices rose to their highest since 2014. It was the first time since the spring of 2019 that inflation exceeded 5%. At that time, prices rose because of a VAT increase. The acceleration had been expected by the Central Bank of Russia. In December, CBR Governor E. Nabiullina said inflation would fluctuate at around 5% in the first quarter of 2021, but slow down to 4% by the middle of the year.

Fitch confirmed Russia’s long-term credit rating at BBB with a stable outlook. The agency noted that such a rating reflected policy reliability and consistency, a strong external balance and the lowest ratio of government debt to GDP among peers. Fitch noted its concern over the low potential of GDP growth, Russia’s dependence on commodities and geopolitical risks. It said that protests in support of Navalny could result in the elections not producing a constitutional majority in the Duma. However, in the short term, Fitch does not see a threat to government stability. It does not expect new US sanctions in the near future as President Biden will need time to calibrate his international policy. Yet, the agency said that the court’s sentence for Navalny may have slightly increased the chances of targeted sanctions from the EU.

According to recent reports, the EIA base case scenario calls for a Brent oil price of USD 95/bbl by 2050 (in 2020 dollars). In the most optimistic scenario, prices would reach USD 173/bbl, while the negative scenario assumes a price at around USD 48/bbl.

EIA oil price forecast for 2050, in USD/bbl

Negative scenario Base case scenario Positive scenario
In 2020 dollars 48 95 173
In 2050 dollars [1] 87 172 313

Last year, before the pandemic, EIA forecast slightly higher prices. By the end of 2050, its base case scenario called for Brent at USD 105/bbl in 2019 dollars, and in the most optimistic scenario USD 183/bbl. However, the worst case scenario assumed only USD 46/bbl.

To watch…

The Central Bank of Russia will hold a monetary policy meeting later this week.

 

Author: Aleksandra Kuznetsova, Junior Investment Specialist

Sources: Rosstat, IMF, Vedomosti, Bloomberg, TKB Investment Partners (JSC); February 2021

[1] Assuming annual inflation of 2%

Russian Equities Weekly_08 February_2021
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