By Luis Saenz,* Head, Equity Sales & Trading, Managing Director, BCS Financial Group, Russia.
In the last few months we have seen a decoupling of Russian credit from the Ruble. We find this intriguing since currency and credit in Russia has moved in lockstep for quite a while. Not a huge surprise since the underlying drivers are similar. In Brazil, an Emerging economy we tend to comp Russia against, this pattern has continued throughout their spectacular meltdown.
In case you were wondering, Russian equity is behaving more in line with the RUB than with Credit (see RTS Index inverted on the right).
So what gives? Our guess is geopolitics. Russian credit, equity and currencies all snapped back in Q1 after the 2014 year end train wreck that was driven by Ukraine, oil and the S&P downgrade hitting Russia at the same time. But in May this year the US Secretary of State made a surprise visit to Sochi, which was followed by an end to the fighting in the east of Ukraine, an Iranian deal, a Putin-Obama meeting next week and yes.. a call between the President and Elton John.
We would argue that at this stage, Russian credit is discounting much quicker the massive turn around in geopolitical risk while RUB is more reflecting the correct level where the Kremlin can balance its budget if you take into account the 1-1.5trn RUB they need to find. We believe that once the MET story clears out, equities will rally. MinFin want the Oil companies to cough up 600bn RUB, the counter offer is 200bn Rub. Will take another 1-2 weeks.
In our BCS Strategy note, released earlier this week, we targeted the RTS to hit 930 in 12 months. This is a bottom up company-by-company target. At the moment, the market is pricing in a more pessimistic scenario. (see attached).
We are fairly bullish here.
*Luis Saenz is based at BCS’s London office.
Link to note => http://goo.gl/JOfJHx
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