PREMIER FOODS TO HIKE PRICES

18 FEATURE TUESDAY 10 JANUARY 2017
CITYAM.COM
TRADING
COMING IN FROM THE COLD
Between a higher
oil price, a
prudent central
bank and warmer
relations with
Trump, there are
reasons to like
Russia this year,
says Will Railton
SINCE Donald Trump’s election,
investors have embraced
his tax-cutting, regulation-ripping
agenda, and have been
resolute in backing perceived
winners and dumping losers.
Developed markets are in; emerging
ones are out – the obstinate tycoon
must be pleased.
Since 9 November, the promise of
higher fiscal spending in the US has
raised bond yields, and caused the dollar
to appreciate in expectation of higher
interest rates this year. Almost
$70bn (£58bn) has poured into US equities
since the presidential election,
Bank of America Merrill Lynch (BAML)
reported and relative currency weakness
is expected to benefit stock markets
in Japan and Europe this year as
well.
Emerging markets (EMs) have drawn
the short straw in this zero-sum trade.
Last week, Turkey’s lira and
Argentina’s peso plumbed new depths,
and BAML reported that $10bn has
fled emerging market bonds and equities
since the election. As the greenback
rises, the dollar debts of EM
corporates and governments become
more expensive to pay down.
Russia’s currency, the rouble, is one
EM currency which has not only resisted
this trend but has actually appreciated
against the dollar since
September. Enticed by higher local-currency
returns, foreign investors have
bought Russian stocks and bonds, leading
the Micex index to rise 32 per cent
in the last 12 months and making borrowing
cheaper for Russian companies
and its government.
THE OIL PRICE
Much of these gains are owing to the
price of oil. Last year, the black stuff
made its largest annual gain since
2009 as the Organisation of Petroleum
Exporting Countries (Opec) and 11
other oil-producing nations – including
Russia – finally agreed to curb production
and end the global glut in
supply.
Russia is expected to emerge from
recession later this year, and with the
roubles in its citizens’ pockets worth
relatively more, analysts and fund
managers say that domestically-
focused stocks could keep rising, even
if export-dependent ones don’t.
“The market was up quite a lot last
year, but that doesn’t mean it won’t go
up more in 2017,” says Colin Croft,
manager of the Jupiter Emerging
European Opportunities fund. “There
are many areas of the market which
haven’t seen earnings upgrades yet,
such as consumer-focused companies
and telecoms.”
If the signatories of last year’s agreement
can stick to the bargain (and
many suspect they will not), the price
of oil could hover between $50 and $60
per barrel. This would be good for
Russia, which recently passed a Budget
for 2017-19 based on the oil price staying
between $40-45 per barrel, and for
the Saudi-led Opec, which wants to
keep the oil price low enough that its
shale-producing competitors in the US
cannot bring too many of their rigs
back online.
CENTRAL BANK STABILITY
But the rouble’s strength is down to
more than just dearer oil, namely a
credible central bank which has kept
monetary policy tight, halving the rate
of inflation in 2016 and ensuring that
Russia is one of a handful of countries
where interest rates may fall this year.
In December, the Central Bank of
Russia (CBR) voted to keep interest rates
on hold at 10 per cent, and is targeting
inflation of 4-5 per cent this year. “This
would provide a very attractive yield on
local currency bonds,” says Croft. It also
provides an eye-catching “carry trade”
opportunity, thinks UBS Group, which
could yield a 26 per cent return in 12
months. A carry trade involves borrowing
in a currency with a low interest
rate and buying one with a high interest
rate – the rouble, in this case.
“A lot of things are clicking for Russia
right now,” says Matthias Siller, manager
of Baring Emerging Europe fund.
“But the CBR has dealt with challenges
such as energy prices and political
issues has convinced market participants
that its approach is very orthodox
and there is no shying away from
short-term pain.” Russia allowed its
currency to float freely in 2014,
making it the only former dollarpegged
oil exporter which has allowed
its currency to bear the brunt of the oil
price collapse from $115 per barrel in
2014 to $28 in February last year. The
2017-19 Budget contains big cuts to
defence and healthcare spending and
tax rises, with the government
It is one of a
handful of
countries where
interest rates may
fall in 2017
showing little appetite for fiscal imprudence,
says Siller. “Even before the
Saudi experiment, the Russian stock
market was up, proving to a lot of sceptics
that it can cope with lower oil
prices.”
BUSTING SANCTIONS?
With Trump set to enter the White
House next week, there is speculation
that economic sanctions imposed by
the US and the EU on Russia over the
Ukraine crisis and its annexation of
Crimea could ease. The US Presidentelect
has refused to acknowledge
Russia’s sponsorship of hacking during
the election, and makes no secret of his
admiration for Russia’s strong-man
leader.
Such thinking may, however, be premature,
not least because the EU views
Putin more dimly than ever. “Sanctions
will be difficult to lift unless Russia
radically changes its Ukraine strategy,”
says Peter Kisler at North Asset
Management. “Although anything is
possible,” he adds.
Sanctions themselves have not hampered
the performance of Russia’s
economy, thinks Croft, but their
removal could provide a further boon
to investor sentiment. Siller agrees, but
thinks that the reaction might be overly
bullish. “I wouldn’t be surprised if it
increased demand for Russian stocks.
But quantifying its impact in performance
terms is more complicated. I’d be
surprised if that, in itself, justified
higher prices.”