Is the Russian Bear Now a Bull?

Eran Peleg, CIO

The Russian equity market and the Ruble have strengthened considerably in 2016 – up around 30% and 15%, respectively. That said, from a very big picture perspective, the Russian equity market has been down in recent years, underperforming its global counterparts. The main factors driving it down have been:

1. Geopolitical considerations / economic sanctions

2. Declining growth and rising inflation

3. Low commodity prices

Russia (in USD terms) versus global equities over 10 years:

Source: Bloomberg, OECD, Clarity Research

Are these factors now reversing? Russia's geo-political position is improving rapidly. it is re-establishing itself as a major global power. This process is now being aided by the growing number of allies that it is finding amongst the leaders of some of the populist forces gaining power within Western countries (Trump being the obvious example). As this is the case, there is a growing chance that economic sanctions will be lifted or reduced. Growth has been weak, to some extent due to low commodity prices – but commodity prices are now higher than they were a year ago and recent agreements between oil producers may support energy prices going forward (from economic point of view, energy is the most important resource from Russia's perspective). Finally, CPI inflation fell to 5.4% from 12.5% in 2016, reversing the previous trend. Macro stability and falling inflation could allow the central bank to cut interest rates in 2017 from what are currently high levels (~5.5% real rates).

An interesting thought – Cyber is increasingly becoming an important political/military tool. We hear about it more and more. Only recently, accusations were made that Russia influenced the outcome of US presidential elections. A few months ago, HackerRank published a study showing which countries have the best computer developers (http://blog.hackerrank.com/which-country-would-win-in-the-programming-olympics/). Russia came in a very-very close second to China. Makes you think about how the global balance of power may be shifting.

So after several years of significant underperformance, are we now seeing a change in the direction of Russian markets -- or are these moves merely a reflection of the significant volatility that normally characterizes these markets and the correction is just around the corner?

Disclaimer:Opinions expressed herein are current opinions as of the date appearing and are subject to change without notice. Clarity is not intended to forecast or predict future events, furthermore the information may not be current due to, among other things, changes in the financial markets or economic environment. In the event any of the opinions used herein do not prove to be true, results are likely to vary substantially.