Russian equity market dynamics
Last week, the Russian equity market performed in line with the broader emerging markets (EM) index. The different sectoral structures of the two indices helped to offset the negative impact of Russia-specific factors such as sanctions fears over geopolitical tensions with Ukraine.
We believe that the introduction of material sanctions against Russia is unlikely. Firstly, any material sanctions are likely to have a dramatic boomerang effect. Secondly, in our view, the chances of Russia invading Ukraine are low. At least until the Nord Stream-2 gas pipeline is fully certified and launched, it is likely that Russia will be cautious in its foreign policies so as not to harm its relationship with the EU. See more details in our recent flash note.
A positive contribution to the Russian market’s relative performance came from the overweight in the materials sector – this rose while the same sector in the broader emerging markets declined – and the underweight in consumer discretionary, which fell by more than 5%.
|MSCI Russia 10/40 TR in USD||-1.8%||11.6%|
|MSCI EM index TR in USD||-1.8%||-3.9%|
|Due to Russia-specific factors*||-0.6%||3.9%|
|Due to difference in sector structure*||0.5%||11.6%|
|MSCI EM HDY index TR in USD**||-0.2%||7.1%|
|* See details of methodology at the end of the report
**MSCI Emerging Markets High Dividend Yield Index
*** We use Brent Oil and LBMA Gold, in USD terms. Energy weight in the MSCI Russia 10/40 is 38%; gold producers’ weight in the index is 9% (as at the end of November 2021)
Data as of 17 December 2021
TKB Investment Partners (JSC) calculations; Bloomberg
|Upside/downside to fair price||28%|
|Data as of 17 December 2021
TKB Investment Partners (JSC) calculations
Main Russian news
The Central Bank of Russia (CBR) raised its key interest rate by 100 basis points to 8.5%. The increase was in line with market expectations. The regulator noted that more than one rate increase was still possible in coming months as inflation was running at double the central bank’s target. Based on the CBR’s forecast, annual inflation should edge down to 4.0–4.5% by late 2022 and remain close to 4% further on.
Russia presented draft deal to the US on guarantees of NATO non-expansion eastward. Under the deal, NATO must deny membership to Ukraine and other former Soviet countries and roll back the alliance’s military deployments in central and eastern Europe. Russia justified the need for guarantees since it believes Western countries are arming Ukraine, which poses a threat to Russia. The agreement also seeks mutual restrictions on the deployment of weapons, including ground-based intermediate and shorter-range missiles as well as nuclear weapons. There is a positive optionality for the Russia equity market from this news. In our view, the rejection of the deal by the US will not worsen the current tension between the countries. However, if the deal is accepted and signed, it would signify great progress in the cooperation between the countries.
Russia’s budget revenue grew in November by 45% YoY after 30% YoY growth in October. An increase was registered both in oil and gas revenues, which grew by 95% YoY, and non-oil revenues, which were up by 21% YoY. At the same time, expenditures declined by 5.9%YoY after a 6.7% drop a month earlier. As a result, over the first 11 months of 2021, the budget surplus reached almost RUB 2.2 trillion (USD 29.6 billion).
Author: Marina Tsutskiridze, Investment Specialist
Sources: Vedomosti, Bloomberg, TKB Investment Partners (JSC); December 2021