Russia: a punt on global recovery, so don't bet on it
Mar 05, 2010
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As the economy nosedived and investors fled, the Russian RTS Index was one of the world's worst performers of 2008. But in 2009 it led the global pack, with an increase of almost 140%. So what will happen this year?
GDP shrank by almost 8% last year after oil prices collapsed (oil and gas production comprises about a third of the economy) and external capital markets closed, causing a credit squeeze. Now growth is gradually recovering. Manufacturing expanded for a second month in February and retail sales were back in positive territory year-on-year in January, notes Bloomberg.com. With households back in action, GDP could expand by 6.2% in 2010, says Citigroup.
But a recovery in consumption is not a done deal. With unemployment recently ticking up again, domestic demand remains "unstable", as Bank Rossii puts it. And the banking system looks fragile, which clouds the lending outlook. Non-performing loans could hit 20% of overall lending this year, says Deutsche Bank's Bob Kommers. Investors are "underestimating" risks.
But oil remains the key, says Capital Economics. Falling oil prices mean revenue will flow out of the country. That will hamper growth. Meanwhile, two-thirds of the RTS Index is made up of energy producers.
And oil is far more likely to fall than rise given that the global recovery is set to disappoint and supplies are ample. Deutsche Bank sees oil averaging just $60 a barrel in the third quarter.
With oil such a large part of the index, the RTS is essentially "a big bet on the broader global recovery continuing", says Lex in the FT. So it doesn't really matter that it's on a forward p/e of about eight – that's around half the figure of many other emerging markets and "a larger discount than can be justified by political and corporate governance concerns". As long as "investors remain skittish about broader risks" – witness the index's 10% slide this year – "Russia may remain out in the cold". Capital Economics reckons that the index, now around 1,420, will fall back to 1,100 by the end of 2010.
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