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Reuters | Updated: Dec 30, 2016, 09.48 PM IST
LONDON/MOSCOW: It's been a tough couple of years for Vladimir
Miroshnikov, head of business development at Rolf, one of Russia's biggest car
dealerships. But like many foreign investors, he's banking on an economic
turnaround in 2017.
Russian car sales, once growing around 50
percent a year, dropped off a cliff in 2015 after the rouble's 2014 collapse
and fell a further 10 percent in 2016.
Miroshnikov remains cautious, saying the next
few months will be tough and seeing the possibility of "a recovery only in
the second half of 2017". However, he told Reuters he expects sales will
at least stop falling over the year as a whole.
Foreign investors are more enthusiastic in
hoping for a revival in economic growth and consumer demand after two years of
recession. Even after roughly 50 percent gains on Russian stocks and rouble
bonds in 2016, analysts and fund managers interviewed for this article remain
almost unanimously bullish on the country.
Russia figures among the top 2017 trades for
Deutsche Bank, Goldman Sachs, UBS, JPMorgan, Rabobank and Bank of America
Merrill Lynch among others, with Goldman predicting it "to move from a
recovery to a growth phase".
On the face of it, the stars do seem aligned for
Russia.
Data showed manufacturing expanding in December at its
fastest pace since March 2011, a signal that the economy is starting to grow
again.
Prices for oil, its lifeblood, will average $57
a barrel, according to analysts' forecasts in Reuters polls, $10 higher than in
2016. And if the central bank brings inflation down to its 4 percent target,
ordinary Russians should have more money to spend.
Two other factors have added impetus to the
trade.
First, Republican Donald Trump won U.S.
elections on Nov. 8 with a promise to improve ties with Russia, holding out the
possibility of easing sanctions imposed after Moscow's 2014 annexation of
Crimea from Ukraine.
And on Dec. 7, Glencore and Qatar teamed up to
pay $11 billion for a stake in state oil firm Rosneft, confirming Russia's
allure for international investors.
Some are confident that the sanctions, tightened
over Russia's role in a separatist rebellion in eastern Ukraine, will go after
the new U.S. administration takes over.
"I like Russia for some very simple
reasons: The most obvious reason is Trump, because sanctions will be
lifted," Luca Paolini, chief strategist at Pictet Asset Management, said.
"But it is a little more complicated than
that. It is one of the few emerging markets where we feel it is
cyclical...where we think there is some decent potential in almost every
scenario."
Hopes related to sanctions got a setback this
week as Washington imposed fresh curbs on Russian intelligence agencies over
the hacking of political groups during the U.S. election campaign.
But many reckon Trump will roll back the
measures once he takes office in January. President Vladimir Putin said on
Friday that Moscow would not expel anyone in retaliation, adding that he would
wait for the actions of Trump before deciding on any further steps in relations
with the United States.
Take the politics out, and Russia looks
attractive relative to many big emerging market (EM) economies. Unlike
countries such as Mexico or Turkey, it has a balance of payments surplus,
making it less vulnerable to the rise in global borrowing costs.
Russia is favoured by bond investors too because
falling inflation may bring 150-200 basis points in official interest rate cuts
next year. That will keep inflation-adjusted bond yields at among the highest
in the world.
"There is a lot more acceptance now that
Russia is in a good place," said Yerlan Syzdykov, head of emerging debt at
Pioneer Investments.
Syzdykov holds more Russian bonds than their
weight in emerging market indexes, but Pioneer is also bullish on Moscow-listed
stocks, he said, adding that the fund was looking to "put more money into
cyclical recovery stories".
Corporate results have been encouraging.
Earnings-per-share, a key profitability indicator, recently surpassed their
10-year average for the first time since 2012.
In recent months analysts have revised up their
estimates of Russian companies' earnings at a faster pace than the rise in oil
prices, Thomson Reuters Datastream shows.
COSTS
But some are sceptical. VTB Capital analyst
Maria Kolbina, for instance, says Russians' real incomes will need to grow by 5-7
percent annually for a couple of years for consumer demand to recover
significantly.
Russia also scores poorly on all measures of
corruption and transparency; its fortunes remain tied to oil exports and a
recent report by the anti-monopoly service found state ownership of the economy
had doubled since 2005 to 70 percent.
But Pictet's Paolini says asset prices reflect
these concerns. Russia has historically traded at a discount to other emerging
markets and even after the 2016 gains, shares' ratio to forward earnings is
half the emerging markets average.
"Russia's PE is still very low, I would be
worried if you had a strong performance and very expensive valuations. But that
is not the case, Russia's PE is 6, Brazil is 14," Paolini said.
Many also see positive structural changes afoot.
"When people say nothing is changing, they
think of corruption and, true, there doesn't seem to be much change on that
front. But the move to inflation targeting and a floating currency is a huge
structural change," said David Hauner, head of EEMEA cross-asset strategy
and economics at Bank of America Merrill Lynch (BAML).
Hauner advised clients last year to load up on
rouble bonds, a bet which paid off handsomely. He predicts at least 10 percent
returns next year, against zero from emerging debt overall.
BAML is also overweight Russian equities and
Hauner said hefty dividend payouts and falling inflation were not yet reflected
in share prices.
"The PE gap relative to EM has not improved
at all, even though Russia has fundamentally improved," he said. "The
only negative thing to say about Russia is that everyone likes it, so if
something goes wrong it could be quite painful."
