Talk of fresh sanctions triggered profit-taking in Russian equities, ending a five-week run of outperformance against emerging market peers. Last week, the Russian index fell by 1.8% in US dollar terms, while the MSCI EM index dropped by 0.5% and the MSCI World rose by 2.4%.

  • Five US senators once again plan to pass a new sanction bill against Russia, the Defending American Security from Kremlin Aggression Act. They tried last year with no result. This bill prohibits the purchase of new Russian government debt, and includes sanctions on Russian banks, the energy sector and several individuals. To come into force, the bill must be approved by the US Congress and signed by the president. We continue to think that the potential boomerang effect would dramatically limit the risk of new material sanctions. Please see page 7 of the recent outlook for further details.
  • The rise in oil prices provided support. Brent oil rose by 6.7% over the week to a three-month high of USD 66 per barrel. Oil is now up by 24.1% since the beginning of the year. The gains were caused by market concerns over global oil supply after the OPEC+ decision to cut production. Moreover, Saudi Arabia has suspended production at Safaniyah, the world’s largest oilfield, due to a damaged power cable. It says that production will fall to just 9.8 million barrels per day in March.

The metals and mining sector outperformed the wider market, mainly due to Raspadskaya and Rusal, whose shares rose by 7.6% and 5.3%, respectively, in rouble terms. Both companies published operational results for 2018 indicating an increase in production.

Companies in the financial sector continued to lag. VTB Bank and Sberbank did the worst, down by 1.43% and 1.15%, respectively, in rouble terms. Banks are rather sensitive to sanction news as one of the proposed measures is to freeze the assets and operations of Russian financial institution allegedly supporting government activities to undermine democracy in other countries.

Week YTD
RTS Total Return (TR) in USD      -1.8% 10.5%
MOEX index TR in RUB
Composite-0.5%5.4%
Blue Chip-0.6%6.3%
Small and mid-cap0.1%5.9%
MOEX sector index TR in RUB
Metals & Mining
0.1%
3.2%
Power Utilities
0.0%
7.7%
Consumer Goods
-0.5%5.2%
Oil & Gas
-0.8%2.2%
Financial Services
-1.1%8.1%
FX
RUB/USD-1.3%4.4%
RUB/EUR-1.5%5.6%

Data as of February 15, 2019
Sources: TKB Investment Partners (JSC) calculations, Bloomberg

Main Russian news

The Russian government will spend 25.7 trillion roubles (around USD 388 billion) on 12 National Projects during 2018-2024. The main goals of the projects are:

  • To bring over 50% of regional roads and 85% of roads in large metropolitan areas in line with national quality standards and to decrease the number of overloaded roads by 10%
  • To increase seaport production capacity from 19 million tons to 44 million tons
  • To reduce delivery times of transit cargoes from 3.2 to 1.6 days on the Europe-western China international transport route
  • To increase the throughput capacity of the Baikal-Amur and Trans-Siberian railways by 50% to 180 million tonnes
  • To develop infrastructure for high-speed transmission, processing and storage of large amounts of data and to start using locally produced software by state-owned companies and the government
  • To take Russia into the top-five of largest economies, ensure economic growth rates exceeding international rates, while at the same time maintaining macroeconomic stability, including inflation of less than 4%

Industrial production growth slowed in January from December 2018. This was mainly due to slower growth in the two key segments: manufacturing and extraction. The OPEC+ agreement to cut oil production from this January held back extraction. Oil production growth in January was 3.1% YoY vs. 4.1% YoY last December. Gas production growth slowed more sharply – to 2.5% YoY in January vs. 6% YoY in December. In manufacturing, car production decelerated notably. After December’s 10.6% YoY growth, production of passenger cars was almost flat in January.

Indicator Growth YoY
 December 2018 January 2019
 Industrial production
 2.0% 1.1%
 Manufacturing  0% -1.0%
 Extraction 6.3% 4.8% 

Sources: Rosstat, TKB Investment Partners; data as of February 15, 2019

To watch…

Gazprom Neft and Lenta are due to publish financial results for Q4

Novatek is due publish financial results for Q4 and full year 2018


Author: Marina Tsutskiridze,junior investment specialist

Sources: Rosstat, Vedomostii, cbr.ru, Bloomberg, TKB Investment Partners (JSC), February 2019

Russian-Equities-Weekly_11-15-February_2019

Categories: Market Pulse