Current valuation levels of Russian debt and equity do not yet reflect the economic turnaround of Russia
RTS Equity ETF (RUSE) gained 19.97% YTD. Russia-focused USD Eurobond ETF (RUSB) gained 7.31% YTD.
What’s next? Read in our ETF newsletter.
Congratulations to our regular readers who earned +14.75% with RUSE (RUSsian Equity ETF) and +5.67% with RUSB (RUSsian Bond ETF) since the beginning of 2019.
New Russian Market Newsletter is available. Attached you will find market update, trading ideas and specific ITI Funds news.
The Russian market has pared all of its February losses thus far in March. RUSE earned almost +11% and RUSB earned +5% since the beginning of 2019.
The World Federation of Exchanges published 2018 Full Year Market Highlights.
2018 was more volatile (value and volume of trading in equities and derivatives was 10-20% higher than in 2017) but less favourable with world market cap and new listings through IPOs falling 15%.
Interest in ETFs is still on the rise. Value of trades in ETFs was up 33.4% while growth in volumes of ETF trading was a whopping 45.7% compared to 2017.
According to the latest report by ETFGI AuM in ETFs and ETPs reached another record of $5.16 trn. This is a 7.13% YTD growth vs. $4.82 trn just less than 2 months ago, at the end of 2018. During 2012-2017 ETF industry was growing by 21% annually and momentum gets stronger.
The number of ETF and ETP providers is also growing. Now there are 7,680 ETFs/ETPs listed globally promoted by 480 providers.
Following the trend, ITI Funds is the first in Europe to offer an ETF White Label Solution allowing professional investment managers to launch their own UCITS V compliant ETF on ITI Funds Luxembourg based ETF Platform.
January 2019 showed net inflows of 54bn RUB in Russian local sovereign bonds from non-residents that broke the previous 6 month trend of outflows. As of Feb 01, foreign investors own 25% of Russian OFZs. Peak of 34.5% was reached in March 2018.
February dynamics will be very important as a test of how serious investors are taking potential new Russia sanctions.
In order to increase RTS index tracking precision and due to recent change in US sanction regime against certain Russian companies Board of ITI Funds RTS Equity UCITS ETF SICAV S.A. approved a re-investment into United Company RUSAL (ISIN JE00B5BCW814) shares. ITI Funds RTS Equity UCITS ETF SICAV (RUSE) has added Rusal shares back to fund’s assets at RUB 30.15 at market on close of Feb 07 (current price RUB 32.65). RUSAL shares had been previously excluded from Fund’s holdings in April 2018 due to US sanctions against United Company RUSAL PLC.
On February 04, 2019 MSCI Inc. announced that “EN+ Group and United Company RUSAL are now eligible for potential inclusion in the MSCI Equity Indexes should they meet the necessary requirements as per the MSCI Global Investable Market Indexes methodology”.
Long Rusal looks attractive for the following reasons:
Rusal market cap of $6.9bn is well below the market cap of its 27.8% stake in Norilsk ($9bn+)
Rusal is FCF positive and its p/e is 3.7x vs median of 11.75x for peers;
Bulge bracket banks will resume coverage after US sanctions lift;
Merrill Lynch was first to reinstate target pricing with a BUY rating today of 5.5 HK$ vs current 3.3 HK$ price tag;
Stock is back on investors’ radar
Potential index inclusion announced by MSCI is positive as expected inflows only from ETFs will top US$60m.
What could spoil the party:
Potential index inclusion is a bit too long term for the investment case;
Aluminum prices already started to go lower and that will reduce RUSAL margins.
Rating agency Moody’s upgrades Russia’s rating to Investment grade (Baa3) and changes outlook to stable.
“The upgrade of Russia’s ratings reflects the positive impact of policies enacted in recent years to strengthen Russia’s already robust public finance and external metrics and reduce the country’s vulnerability to external shocks including fresh sanctions. The stable outlook reflects evenly balanced upside and downside credit risks.”
Congratulations to our investors who earned +12.09% with RUSE (RUSsian Equity ETF) and +1.31% with RUSB (RUSsian Bond ETF) in January 2019. In this newsletter you will find new trading ideas, analytical research for institutional clients, special report “Dividend Strategy for 2019 – Russia: the land of generosity”, specific ITI Funds news. Download newsletter
MSCI Inc. announced late Friday that “EN+ Group and United Company RUSAL are now eligible for potential inclusion in the MSCI Equity Indexes should they meet the necessary requirements as per the MSCI Global Investable Market Indexes methodology”.
Rusal shares closed +4.8% in Moscow on Monday on the news.
For us long Rusal looks attractive for the following reasons:
+ Rusal market cap of $6.9bn is well below the market cap of its 27.8% stake in Norilsk ($9bn+)
+ Rusal is FCF positive and its p/e is 3.7x vs median of 11.75x for peers;
+ Bulge bracket banks will resume coverage after US sanctions lift;
+ Merrill Lynch was first to reinstate target pricing with a BUY rating today of 5.5 HK$ vs current 3.3 HK$ price tag;
+ Stock is back on investors’ radar:
+ Potential index inclusion announced by MSCI is positive as expected inflows only from ETFs will top US$60m.
What could spoil the party:
– Potential index inclusion is a bit too long term for the investment case;
– Aluminum prices already started to go lower and that will reduce RUSAL margins.
ITI Funds RTS Equity UCITS ETF SICAV (RUSE) will add Rusal shares back to fund’s assets in coming days.
This is our last newsletter in 2018. We’ll talk about
On the 29th November the board of ITI Funds UCITS ETF SICAV approved the below dividend for 2018 year.
Fund name: ITI Funds RTS Equity UCITS ETF SICAV. ISIN: LU1483649312. Ticker: RUSE. Declared Dividend: USD 0.76 per share.
The dividend will be paid to shareholders on the 17th December 2018. As from the NAV dated the 11th December 2018, the shares issued in this sub fund will be considered as ex-dividend.
The research is provided by our partner – ITI Capital. Download for free
The economy has absorbed the negative effect of the US sanctions and is ready to roll back. Download newsletter
Moody’s Investors Service thinks it’s likely that the U.S. will sanction Russia’s sovereign debt. But it might just upgrade the country to investment grade anyway. “Those sanctions are likely to come because they would target what the administration has in mind: trying to impose pain on Russia,” Moody’s analyst Kristin Lindow said in an interview in Moscow. At the same time, Russia’s low borrowing requirements make it “resilient,” she said. Read the full story.
An escalating war of words between Russia and the U.S. didn’t prevent a chunk of pensions that belong to Californian firefighters and police officers from finding its way into debt sold by President Vladimir Putin’s government. The California Public Employees’ Retirement System, or Calpers, had about $460 million invested in Russian government bonds as of the end of June, up over 8 percent since last year, according to data provided to Bloomberg News. Read the full story.
Investors in Russia made profit. Download newsletter
Don’t worry about sanctions and buy Russia’s ruble.
That’s the recommendation of Deutsche Bank, which says the Russian currency could rise to 60 rubles per dollar, a level not seen since a sell-off in April when the U.S. imposed sanctions on the country’s oligarchs. The ruble is among the cheapest currencies in the bank’s valuation model and should benefit from a hawkish central bank, lighter foreign bond positioning and higher oil prices, said Christian Wietoska, a strategist at Deutsche Bank.
To read the full story use Bloomberg terminal.
“We’ve seen dynamics that point to an improvement in credit worthiness,” Erich Arispe, director of sovereign department at Fitch, says at conference in Moscow.
– Russia is the “only sovereign oil exporter where we’re looking at positive credit momentum.”
– Russia central bank’s 25bps rate hike earlier this mo. was in line with what Fitch would expect from a “prudent central bank”: Arispe
– Bank of Russia is “walking the talk”
To read the full story use Bloomberg terminal.
Last week, Donald Trump attacked the Organization of Petroleum Exporting Countries (OPEC) in yet another extension of what has become a semi-regular war of words over oil prices. Rather than engaging Trump in a twitter battle, the Saudi oil minister, Khalid al-Falih, responded from Algeria on Sunday, after a meeting of the joint OPEC and non-OPEC ministerial monitoring committee. His response to President Trump’s call to increase oil production was an emphatic “not now.” Read the full story.
Sanctions – do they make any difference? Download newsletter.
Russian Economy Minister Maxim Oreshkin said on Wednesday the rouble has “seriously deviated” from fundamental value but he expected it to firm to 63-64 roubles to the U.S. dollar in December this year. So far the tools had not been necessary and there was no need to make exporters sell foreign exchange to support the rouble, officials have said. Read the full story.
The country still has many levers to defend the ruble. The ruble has been swept up by the outgoing tide of the emerging market currency crisis. The Russian currency, down almost 17 percent against the dollar this year, sank to a two-and-a-half-year low on Thursday after Russian Prime Minister Dmitry Medvedev urged the central bank to cut interest rates to stimulate growth. Read the full story.
Despite sanctions, Russia’s economic fundamentals have remained stable. Russia’s international reserves have continued to grow. Unemployment has fallen to a post-Soviet low. Inflation has consistently dropped since 2015. Source.
Stiff new U.S. sanctions against Russia would only have a limited impact on its oil industry because it has drastically reduced its reliance on Western funding and foreign partnerships and is lessening its dependence on imported technology. Read article.
Russian market. Is it time to invest? Sanctions. Oil. Ruble. GDP.
Just when Russian debt was starting to look like a safe bet, investors were hit this week with a reminder that the biggest risk of all is still lurking just around the corner. Read article.
The mobile operator Megafon’s plan to delist in London is the latest sign that the West is becoming inhospitable. The planned delisting of Megafon PJSC, Russia’s second-biggest mobile operator, from the London Stock Exchange is no ordinary event. The company is one of the most liquid Russian stocks trading overseas, and its exit is further evidence that the country’s businesses are turning inward as exposure to the West becomes increasingly problematic.
In 2011, almost 70 Russian companies’ depositary receipts traded in London. Offering those securities wasn’t just a way to raise money from foreign investors, it was also considered a badge of honor, a sign that a company had arrived. Now, there are fewer than 50 Russian listings. Soon after Russia annexed Crimea in 2014 and was hit with the first, relatively light Western sanctions, First Deputy Prime Minister Igor Shuvalov urged the country’s companies to delist as “a question of economic security.” A number of firms followed that advice after discovering how quickly their stock prices could tank on Russia-related political news. For some companies, such as the homebuilder PIK, the meat producer Cherkizovo or the drugmaker Pharmstandard, the London listing didn’t provide enough liquidity, and forced them to observe the constraints of a Western public company and adhere to stringent transparency requirements that carried significant costs.
In partnership with Inside ETFs Europe, as they prepare for their annual conference held in London on 1st & 2nd October 2018, I will be counting down my top 100 ETFs that should be in every Discretionary Fund Manager’s toolbox.
ITI Funds Russia-focused USD Eurobond UCITS ETF
Ticker: RUSB, Listing Venue: London Stock Exchange, TER: 50bps
This particular fund is one of two in ITI’s inaugural launch not too many months ago, where the objective of the fund is to track the ITI Funds Russia-focused USD Eurobond Index based on 25 government and corporate bonds of Russian issuers denominated in USD.
It’s always good to welcome new entrants to the ETF market, and in this case, it is the company operating under the name of ITI Funds, headquartered in Moscow, Russia, with its FCA Regulated entity operating out of London.
Facing the challenge of deciding which ETFs to include in a Top 100 list, one has to be mindful of purely using an analytic selection process, that almost certainly would screen out all new products from that list. Assuming there really are changes afoot across the ETF industry one wouldn’t pick that up just by focusing on the ‘Global Titan’ ETFs that quite understandably dominate the industry and press coverage.
With the decision taken to launch the reference benchmark index in partnership with the German boutique index provider Solactive, one does indeed pick up some of that change of alliances. I would be very surprised if S&P, FTSE Russell & MSCI didn’t remain the brand names to compete with, even in 25 years’ time, but Solactive have grown rapidly and represent what the FinTech movement is all about.
The argument to include exposure to USD denominated Russia centric Euro Bonds in one’s portfolio will invariably be driven by the needs of diversification and the constant search for uncorrelated returns. It’s perhaps a bit too early to assess that aspect of this ETF, but certainly one that has the hallmarks to do precisely that. As this ETF has only been listed for less than 12m currently no analytics available
Inside ETFs Europe Conference – Passive Investing For Sophisticated Investors
All data and analytics provided by ETF Info & Algo-Chain
With the 2018 World Cup underway, all eyes are on Russia. Having generated negative headlines in the international political arena, it is encouraging, and perhaps surprising, to see the ongoing scale of foreign investment in the country, says Elio Manca, managing director of ITI Funds. The truth is that Russia’s long-term investment drivers are still in full force, leading many to continue overweighting the country or even using current volatility to increase their position. In fact, Russia’s largest lender, Sberbank, reported that UK and US investors hold nearly 70% of its shares, while global investors were the driving force behind Russia’s $4bn (£3bn, €3.4bn) Eurobond issue in early March. Russia’s growth story continues to have traction, helped by the Central Bank’s gradual approach to monetary easing – meaning macroeconomic indicators in the country remain very strong. Putin’s recent landslide election victory has granted leadership stability, and international data on Russia is still pointing to strengthening growth throughout 2018.
It’s understandable why people would want an active product to allocate to Russia but an ETF approach can produce similar returns without carrying as much risk. That is according to ITI Funds’ managing director Elio Manca. Speaking to Citywire Selector, Manca discussed why now is a prime time to launch ETF products solely focused on the World Cup host. ‘Essentially in emerging markets like Russia you are getting a bigger risk on liquidity in the small-cap market when you’re invested in an active fund. These less liquid names definitely provide value to investors, but you are taking a bigger risk. ‘Fund selectors should be asking active managers if they have a team with a good knowledge of Russia and they need to think about the sort of fees they want to pay. Active managers can outperform as well as underperform, but that’s the risk investors are taking.’ Da Vinci Capital, a private equity manager making investments in emerging markets and Russia, launched ITI Funds as a European ETF platform in February of this year. Shortly after ITI launched two Russia-focused Ucits ETFs, one to focus on the equity market and one to focus on fixed income.
Oil and gas companies dominate the Russian economy, but investor efforts to encourage better corporate governance are beginning to yield results. Russia and ethical investing are not typical bedfellows. The top priority for President Vladimir Putin’s government is improving the economy, ramping up productivity and streamlining the bureaucracy. Environmental protection and social issues are a long way down the list. According to Elio Manca, managing director at ITI Funds: “The big companies in Russia are involved in oil and mining”. “Russia and environmental, social and governance (ESG) do not typically go together,” he said. But this may be beginning to change.
The Russian economy will expand 1.9% in 2018, 1.7% in 2019 and 1.6% in 2020, according to a survey conducted by Bloomberg News.
Is it time to jump back into emerging-markets bonds? UBS Group AG thinks so.
Strategists at the Swiss bank said they would use the recent sell-off to buysovereign debt from Indonesia, Argentina, Russia and Nigeria, in a note Tuesday. They also prefer emerging-market corporate bonds relative to their developed-market equivalents, despite the pair’s growth cycles moving in different directions, according to the report.
“EM’s growth may be coming under question, but its stock variables, such as short term debt owed to foreigners, are in reasonable shape,” the strategists including Bhanu Baweja wrote.
Recovery continues at the start of Q2.
The latest Russian activity figures suggest that GDP growth picked up to about 1.5% y/y at the start of Q2. These data also provide early evidence that the tightening of US sanctions and the fall in the ruble in early April have had little impact on the real economy so far.
The relatively soft start to the year means the risks to our above-consensus growth forecast of 2.5% for 2018 lie to the downside, but we still think the recovery will gather pace over the coming quarters. The pick-up in real disposable income growth, to 5.7% y/y last month, from 4.5% y/y in April, points to stronger consumer spending ahead. And the central bank is likely to resume its easing cycle.
Russian GDP expanded by a weaker-than-expected 1.3% y/y in Q1, but the data do at least confirm that
the economy is recovering from its slowdown in late 2017. And we think growth will strengthen by more
than most expect over the rest of this year
Regional growth strengthened a touch in Q1, driven by an improvement in Russia
Oil prices rose more than 3 percent on Wednesday, hitting 3-1/2-year highs, after U.S. President Trump abandoned a nuclear deal with Iran and announced the “highest level” of sanctions against the OPEC member.
Ignoring pleas by allies, Trump on Tuesday pulled out of an international agreement with Iran that was agreed in late 2015, raising the risk of conflict in the Middle East and casting uncertainty over global oil supplies at a time when the crude market is already tight.
Russia will diversify its international reserves further, President Vladimir Putin said on Tuesday.
“The monopoly of the U.S. dollar is not reliable enough, it is dangerous for many,” Putin told Russia’s lower house of parliament.
Russia held 45.8 percent of its reserves in U.S. dollars as of Jan. 1, 2018, the central bank data showed last week.
The central bank also holds other currencies in state reserves, which last stood at $460.4 billion. A significant part of the reserves is held in gold.
“Fundamentals look solid and the market probably overreacted to the sanctions due to a generally overweight position,” Yerlan Syzdykov, co-head of EM fixed income at Amundi says in research note.
“An EM recovery from here is likely to be about what has sold off the most,” Geoff Kendrick, emerging-markets strategist at Standard Chartered, says in research note. “That is the ruble.”
Russian central bank (CBR) put a stop to monetary easing following five consecutive cuts in interest rates after the latest round of U.S. sanctions jolted the ruble and raised risks for inflation.
The decision to leave the policy rate unchanged at 7.25% was correctly anticipated by most analysts.
According to Capital Economics: “the dovish tone of the accompanying statement supports our view that rates are likely to be lowered further over the rest of 2018. The market’s response to this month’s currency sell-off – it removed almost all expectations for monetary easing over the coming year – seems like an over-reaction.
While there is a growing chance that the policy rate won’t be lowered as far as our current forecast of 6.00%, we think it is premature to change our view. And the key point is that rates are likely lowered further than the markets are now pricing in. Markets had expected 75bp of cuts over a six-month period before the ruble sell-off; they are now pricing in just one 25bp cut in a year’s time.”
This summer’s World Cup could have a total impact on the Russian economy of nearly $31 billion, organizers predicted Wednesday.
A new report on the economic impact of the tournament said the boost for the country’s GDP could amount to between 1.62 trillion rubles ($26 billion) and 1.92 trillion rubles ($30.8 billion) over the 10 years from 2013 through to 2023.
That’s attributed to growing tourism plus large-scale spending on construction, plus later knock-on effects from those government investments. It even suggests the World Cup will encourage Russians to exercise more, so they take fewer sick days.
The World Cup “has a considerable economic effect,” Deputy Prime Minister Arkady Dvorkovich says in the report. “The tournament has already boosted the economic development of the host regions and will continue to have a positive long-term economic impact.”
Investors have good reason to remain cautious on Russia. The latest sanctions stretch wider and deeper than the measures the U.S. and European Union imposed after the Kremlin’s 2014 invasions of Ukraine.
Barron’s named Sberbank one our favorite emerging market stocks for 2017 based on rising oil prices and the expectation for better relations with the U.S.; the shares have since risen 31% (“Our 2017 Picks: Russia’s Sberbank and Mexico’s Cemex,” Dec. 17, 2016).
A rebound of that size from a steep decline could happen again, but Russia’s sovereign debt looks like a better, safer bet than the country’s equities right now. In part that’s because of the uncertainties surrounding the new sanctions. On the other hand, Russia is much better armored against financial attack than four years ago.
Investors should be on more solid ground with Russian sovereign bonds, which ironically seem better protected than private companies from sanctions provoked by actions of the Russian state.
That leaves the underlying credit story, which is that Putin has been obsessed with macroeconomic probity since his scarring experience renegotiating Russia’s Soviet-era debt in the early 2000s. If the Kremlin didn’t default in 2014, it won’t default now. Yet yields on its Eurobonds are in the 5.2% range—about the same as those of its less-proven ex-subject, Azerbaijan—while ruble bonds known as OFZs pay around 7.5%. Ashmore’s Dehn recommends a bet on these, given the support the ruble should get from rising oil abroad and vanishing inflation at home. Servicing on overall Russian debt (see table) will decline in the next year or so.
Buying emerging market bonds isn’t straightforward for retail investors. But Moscow-based Da Vinci Capital launched a London-based exchange-traded fund in February, the ITI Funds Russia-Focused USD Eurobond UCITS fund (RUSB.UK). Or you could try the Raiffeisen Bond Fund RU fund, which is listed in Moscow (RAIFBND.Russia). Moscow’s credit isn’t more solid than Washington’s yet, but it’s more solid than it might seem.
The international rating agency Fitch does not expect “any direct impact on the ratings” of Russian banks due to US sanctions imposed on April 6.
Sberbank PJSC’s board proposed a dividend payout of 36.2% of last year’s profit, up from about 25% in 2016, as the Russian government seeks higher financial contributions from state-backed firms.
President Trump rejected, for now at least, a fresh round of sanctions set to be imposed against Russia on Monday, a course change that underscored the schism between the president and his national security team.
The US sanctions imposed on Russia last Friday have caused turmoil in Russia’s markets today and financial conditions have tightened as a result. But at this stage it doesn’t look like there will be a significant impact on growth in the economy as a whole.
China and Russia have denounced what they described as America’s unilateralism as both sides sought to flag up their increasing rapport.
They have pledged to deepen their political and military ties at a time when Moscow is facing international isolation over the poisoning of a former spy and his daughter in Britain, and China is becoming embroiled in a tit-for-tat over trade with the US.
Chinese State Councillor and Foreign Minister Wang Yi visited Moscow this week for talks with his Russian counterpart and both sides used the opportunity to criticise the US while highlighting their closer military and political cooperation.
The Trump administration is unleashing additional sanctions against seven Russian oligarchs with ties to President Vladimir Putin along with 12 companies they own or control.
The measures announced by the Treasury Department on Friday were also aimed at 17 senior Russian government officials and the state-owned Russian weapons trading company, Rosoboronexport.
Russia is ready to discuss mechanisms of long-term cooperation with OPEC at ministerial meeting planned for end of April in Jeddah, Energy Minister Alexander Novak tells reporters on plane from Moscow to Ankara.
Europe’s largest asset manager is tuning out noise from a deepening diplomatic spat and holding on to a big overweight in Russian bonds and the ruble. Sergei Strigo, the head of emerging-market debt and currencies at Amundi Asset Management, says he “doesn’t see any reason” for the rising geopolitical tensions to damp his bullish view on Russian assets. He took part in the government’s $4 billion Eurobond sale, which came one day after the U.K. blamed Russia for poisoning an ex-spy on British soil.
“We still like Russia as an investment opportunity,” Strigo said from the London offices of the $1.8 trillion asset manager. “With oil prices at these levels, macroeconomic indicators in Russia remain very strong.”
Strigo says he’s watching the situation closely but is much more focused on macroeconomic indicators, such as the Russian central bank’s gradual approach to monetary easing and the rising price of oil. Restrictions imposed on Russia over its annexation of Crimea don’t prevent investors from buying government bonds.
“As long as sanctions don’t impact investing in Russian assets in general, then there is no change,” Strigo said. “We have been overweight Russian assets for a while, that’s a view we are sticking with.”
The United States and its European allies are expelling dozens of Russian diplomats in a co-ordinated response to the poisoning of a former Russian spy in the UK. More than 20 countries have aligned with the UK, expelling more than 100 diplomats.
The Bank of Russia cut the key rate by 25 bps to 7.25%, as widely expected. The accompanying statement reiterated the Bank’s view that the disinflationary factors that have helped to reduce inflation recently will be persistent. It also suggested that the transition to a “neutral” monetary stance
(which it has suggested means a policy rate of 6-7%) “will” be complete this year. Last month’s statement had indicated that this transition “may” be complete by the end of 2018.
Capital Economics’ kept their forecast that policy rate will be lowered to 6.00% by the end of this year.
With almost all the votes now counted, Putin has won 76.7% of the vote, the best result in any of the four presidential elections in which he has participated. Turnout, which was also seen as a gauge of Putin’s support, was a little better than in 2012.
The focus will now turn to the appointment of a new cabinet, which may provide clues about both policy direction and succession plans after Putin (possibly) steps down in 2024. Any announcements of amendments to this year’s budget may signal a shift in fiscal policy, which had been hinted at prior to the election.
On Friday 16th March, RTS index had the quarterly rebalance:
X5 Retail Group (FIVE RX), a food retailer company, was added to the index with a 1.1% weight.
According to VTB Capital X5 Retail’s GDRs may be included in May into MSCI Russia, if its average daily volumes top $2.7MM.
Top 3 index holdings are: Gazprom (14.3%), Lukoil (14.1%), Sberbank (13.0%).
The ITI Funds RTS ETF (RUSE.L) has been rebalanced accordingly.
About 170 global investors submitted $7.5bn bids in Russia’s eurobond placement on Friday, according to VTB Capital, the sole lead manager and bookrunner.
$2.5bn Russia 2047 5.25% Eurobond, buyers were from:
$1.5bn Russia 2029 4.625% Eurobond, buyers were from:
Sale signals Kremlin can still raise cash in western markets, despite sanctions.
On Thursday 15th March, ITIEURBD index had the quarterly re-balance:
PGILLN 5 ¼ 02/07/23 Corp and ALFARU 7 ¾ 04/28/21 Corp were added to the index. GPBRU 4.96 09/05/19 Corp was deleted, being left with maturity below 18 months.
Current index offers 4.6 years duration, 5.8% weighted coupon and 4.2% yield to maturity.
ITI Funds Russia-focused USD Eurobond ETF (RUSB.L) has been rebalanced accordingly and holds 23 securities.
Soccer fans may contribute $2.5b-$4b to internal consumption, resulting in 1-2% private consumption growth y/y in 3Q, according to Nordea.
The European Union on Monday announced the extension of six months of individual sanctions against a number of Russian citizens and companies imposed due to the annexation of Moscow by Crimea and the support of separatists in the conflict in eastern Ukraine. The sanctions, which include restrictions on entry to the EU and the freezing of assets of 150 individuals and 38 companies on the blacklist, will be extended until September 15, the Council of the European Union said.
“Investors are generally overestimating the risk of U.S. and international sanctions on Russia,” Luc de la Durantaye said. “The ruble has one of the highest carry and real rates in our 32-currency universe. Russia also has a current-account surplus, which is helpful in a rising U.S. rate environment.”
A recovering economy and climbing oil prices that offset the drag from international penalties mean the ruble is 30 percent undervalued versus the dollar, according to de la Durantaye. He also thinks the ringgit should be trading 17 percent stronger, even though Wells Fargo Securities LLC last week named it as the currency most sensitive to a potential trade war.
Russian inflation figures for February (2.2% y/y) confirmed that underlying price pressures remain weak and another cut in the central bank’s policy interest rate at the next Board meeting (23 March) is almost certain. Barclays predicts a 25bps cut in policy rate. Capital Economics has penciled the same cut, but sees if anything the risk of a 50bp reduction.
Investment activity growth resumed in January, supported by “easing of borrowing terms” and improvements in investment plans of industrial companies, Bank of Russia says in report on economy.
S&P raised the credit ratings of several Russian companies, including Gazprom (from BBB-to BBB) and Russian Railways (for foreign currency obligations have been raised from BB+ to BBB-), following the increase in the Russian sovereign rating.
The outlook for all ratings is “stable.”
In light of the flattening of Russian sovereign Eurobonds’ curve, as well as corporate and bank issues, BCS is recommending to shift from long-term issues to medium-term ones, as the shrinking premium in duration does not compensate for market risks.
S&P Global Ratings raised its foreign currency long-term and short-term sovereign credit ratings on Russia to ‘BBB-/A-3’ from ‘BB+/B’.
The Positive Outlook reflects continued progress in strengthening the economic policy framework underpinned by a more flexible exchange rate, a strong commitment to inflation-targeting and a prudent fiscal strategy. This policy mix is contributing to improved macroeconomic stability and, together with robust external and fiscal balance sheets, increases the economy’s resilience to shocks.
In Russia, credit rating reviews by S&P and Fitch on Friday (16 February) may be a catalyst for further inflows. Out of the two rating reviews the spotlight will be on S&P which currently attaches a positive outlook to its BB+ (foreign currency) and BBB- (local currency) ratings. An upgrade of the foreign currency credit rating would make Russian hard currency bonds eligible to reenter the Barclays’ Global Aggregate Index and lead to forced buying as a result. By contrast, an upgrade of the local currency rating (either by S&P or by Fitch) would have no index impact at this stage, but might trigger inflows from non-index investors.
Russian Eurobonds may see more than $2 billion of inflows if the nation wins back an investment-grade credit score this month, according to Societe Generale SA. S&P Global Ratings is due to review Russia’s sovereign rating on Feb. 23 as investors including Amundi Asset Management predict it’s only a matter of time before the world’s biggest energy exporter is lifted out of junk. Russia’s foreign debt is still rated investment grade at Fitch Ratings, meaning an upgrade by just one other agency would make it eligible for inclusion in the global benchmarks that international funds follow, such as Bloomberg Barclays and JPMorgan Chase & Co. indexes.
Russia’s economy slowed over the second half of 2017, but the latest data for January suggest that conditions have improved at the start of this year. We expect growth to strengthen over the coming quarters and, indeed, our 2018 GDP growth forecast of 2.5% is above the consensus.
Global demand for oil will grow faster than expected this year, the Organization of the Petroleum Exporting Countries (OPEC) said on Monday, pointing to healthy economic growth around the world. “This close linkage between economic growth and oil demand is foreseen to continue, at least for the short term.”
The Vienna-based group now expects demand for crude oil to rise by 1.59 million barrels per day (bpd), an upward revision of 60,000 bpd from its previous monthly market report.
Oil production outside the OPEC will expand by 1.4 million barrels a day in 2018, about 250,000 a day more than the cartel projected last month.
Share of Russian government Eurobonds, held by foreign investors, increased to 37.9% in 4Q from 36.6% q/q
The Russian central bank’s 25bp cut in its policy interest rate (to 7.50%) today was smaller than we had anticipated, but the decision was accompanied by a very dovish statement that paves the way for significantly more easing this year. We remain comfortable with our forecast for the policy rate to be lowered to 6.00% by the end of the year, which is lower than the markets are pricing in.
33% of international investors held positive view of Russian business climate in 2017, up from 23% in 2016, Kommersant reports, citing survey by FleishmanHillard Vanguard agency and Russian Union of Industrialists and Entrepreneurs (RSPP).
Respondents holding negative view of business climate fell to 22% from 53%, lowest level since 2013.
Survey involved more than 100 companies from the Fortune 500 list.
Germany Economy Minister Brigitte Zypries rules out reconsidering Russian sanctions unless government in Moscow sends a “signal” it will change policy.
Zypries says aware of German eastern state premiers urging government to ease sanctions.
Zypries says interested in maintaining dialogue with Russian government.
Moody’s on Monday affirmed the ratings of Sberbank, VTB, Gazprombank, Vnesheconombank, AIZhK, Roseximbank, State Transport Leasing Company, DeltaCredit and Rosselkhozbank and changed their outlooks to Positive from Stable.
The change in the outlook on Russia’s Ba1 government bond rating to Positive from Stable led to corresponding changes in the outlooks on the local currency deposit, debt, issuer and corporate family ratings of nine Russian financial institutions” the agency said.
The Emerging Market election calendar is busier than it was in 2017 but, whereas elections this year boosted the prospects for economic reforms in some EMs (e.g. Argentina), the likelihood that elections in 2018 produce similar positive shifts is lower. The focus in the early part of the year will be on Russia. The economy is unlikely to be a major theme of the presidential election in March but attention will gradually shift to what happens post-Putin and jockeying among rival factions could have significant economic and market implications.
What to watch for:
Rising oil prices, a drop in inflation, and strong GDP growth have helped Russia to emerge from a recent recession with better economic prospects than it has seen since before the global financial crisis. With stocks in the country remaining remarkably cheap despite offering some of the most attractive dividend yields in the developing world, Russia’s market is fast becoming an increasingly pivotal part of any savvy emerging market investors’ portfolio. This year has seen the end of a two-year recession for Russia. This began in 2014 when its currency - the ruble - collapsed as a result of sanctions imposed by the US government alongside a global drop in oil prices to less than $30 a barrel. In March 2015, during the worst throes of this recession, Russia’s central bank was forced to raise interest rates to as high as 17pc in order to protect its currency as inflation hit an eye-watering 16.9pc. Since then, Russia’s inflation has declined dramatically, hitting a historic low of 2.7pc in October this year, well below the government’s target of 4pc. In line with this, Russia’s government has allowed interest rates to fall back to 8.25pc, with many expecting further cuts in the near future. With the help of stabilising crude oil prices, which have returned to more than $50-a-barrel since the recession, Russia’s GDP growth has also bounced firmly back into positive territory in 2017. Indeed, in the second quarter it hit 2.5pc, its fastest rate in nearly five years. Russia’s government remains confident that GDP growth will come in at least 2pc for the whole of 2017 before extending to 2.5pc next year. Its stock market - the RTS - was among the top emerging market performers last year, delivering impressive dollar returns of 50pc. It has continued to rise in 2017. But with markets failing to account for these economic improvements in their valuation of the country’s markets, shares remain highly discounted; the economist, Robert Shiller recently claimed that Russia has one of the lowest price-to-earnings ratios in the world, at around half that of its emerging market peers. In the final quarter of last year, Russia received a welcome boost as a result of the election of Donald Trump as US president. With Trump in tow, many felt that sanctions introduced in 2014 as a result of Russia-Ukraine crisis were much more likely to be lifted, and shares soared. Although relations between Russia and the US remain frosty for now, many have pointed to the country’s recent decision to make the ruble a floating rate currency as an effort to properly open up to foreign investment. The nation is throwing more weight behind structural reform. A particularly interesting development came in April, when its government demanded that state-owned companies pay out half of their profit in dividends this year. Although the move was chiefly driven by a need to cover the federal budget, it also came as a boon to private investors in affected companies. Perhaps coincidentally, the move falls in line with a general trend of increasing Russian dividend payouts in recent years. Since 2014, dividends on a $100 dollar investment have risen from around $2.5 to $3-4, making the country one of the most lucrative hunting grounds in the world for income investors.
With more than half of the RTS index comprised of oil companies and Russia itself currently positioned as a leading exporter of natural gas, the country’s short-term outlook is likely to remain relatively stable if analysts’ expectations of a broadly flat oil market are correct. But now that the days of $100 oil have passed, an alternative way of getting exposure to the country’s large dividend yields can be found in its increasingly wealthy population and jump in consumer spending. With inflation currently in a trough and low interest rates turning consumers away from saving, household spending increased by 4.3pc in the second quarter of 2017, while retail sales have snapped out of a record 27-month period of contraction and rose to near-three-year highs. When a 150-million strong population decides to spend more on luxury goods, services and holidays, the beneficiaries will be sectors such as housebuilding, retail, and air travel rather than commodities. A particularly effective way of gaining exposure to this trend while remaining part of the country’s commodity narrative is through an exchange traded fund (ETF) which directly invests across the whole Russian stock market. By exposing themselves to both commodity and non-commodity stocks, investors can potentially cash in on more than one investment trend while limiting downside risk in the event of another drop in oil prices. With much of Russia’s growth story yet to fully pan out, a diversified exposure to the country’s market trends as they continue to develop is the perfect way to cheaply broaden income streams within a wider emerging market portfolio.
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