Spotlight on Russia as emerging-market favourite

Soaring energy costs are fueling optimistic wagers on developing-country exporters, with Russia emerging as the preferred investment destination for traders.

Russia’s ruble has risen more than any other emerging-market currency this month, boosted by the possibility of increased oil & gas revenues, while the country’s stocks have outperformed a wide index of developing-market shares. This week, investors will keenly monitor OPEC’s monthly report for additional signals about the oil industry’s prospects.

It represents a sharp change of pace for emerging-markets investors, who have spent the last several weeks fretting alternately over the potential of cascading loan delinquencies resulting from China’s Evergrande crisis and the looming likelihood of Federal Reserve tightening policies. This has dampened demand for emerging economy equities, bonds, and currencies across the board – until recently.

Investors have shifted their focus to evaluating the assets of energy exporters ranging from Russia to Colombia – whose peso is the month’s second-best performance.

“Energy prices will continue to rise, and corporations in commodity-exporting nations will benefit from global supply constraints on energy-related goods,” said Ali Akay, chief investment officer of hedge fund Carrhae Capital in London. “This topic should be carried forward in order to re-rate energy and raw material exporters.”

Russian Doll Ructions in the energy market have focused attention on Russia’s position as an oil and gas giant and on its fiscal soundness. The world’s largest energy exporter has over $600 billion in reserves, an enviably low debt load, and is aggressively pursuing inflation control through rate hikes. On Monday, the value of Russia’s oil exports in local currency was around a record 6,000 rubles per barrel of Brent.

A comparison of Russia’s earnings upgrades to those of other emerging markets demonstrates the discrepancy. Since the second half of the year, 12-month earnings expectations for Moscow-listed stocks have increased 15%. In comparison, profit projections for Saudi Arabian enterprises have climbed by 6.7 percent, remained stable in Asia, and declined in Latin America. Despite recent advances, energy businesses in developing nations are also approximately a third cheaper than the broader index, implying that the rally has room to run.

Money managers such as Carrhae Capital, a London-based hedge fund, responded by partially shifting their portfolios away from Chinese technology stocks and toward Russian energy businesses in the third quarter.

Additionally, Wells Fargo Asset Management shifted its investments away from China and toward Russia.

JPMorgan Chase & Co. increased its position in the Russian Depositary Index as it remained positive on commodities and oil-related bets through the end of the year, according to a research by strategists led by London-based Davide Silvestrini.

“Increased oil prices will result in higher earnings and dividends for energy firms, which account for 59% of the index, as well as a stronger ruble, which will benefit domestic stocks, which account for another 25% of the index,” they stated. “As such, it is fundamentally ideal as a vehicle for our bullish call on commodities, particularly oil.”

Indonesia is benefiting from the rise in commodity prices in Asia, with foreign stock inflows reaching their highest weekly level since May 2020 last week. This month, the rupiah is Asia’s best-performing currency.

This week’s noteworthy events and data include the following:

Russian Energy Week, which runs from Wednesday to Friday, will highlight the country’s fuel and energy industry’s ambitions.

If you would like to learn more about Equinox’s focus on Russia, please register your interest here:

A member of the team will contact you shortly to discuss your requirements.

Thank you, we look forward to hearing from you soon

Equinox Fund Management

Research & Insights #10

OPEC+. Despite the fact that oil prices have jumped more than 50% this year, the Opec+ group (which includes Russia) decided on October 4 to stick to the plan formulated this summer. They will only gradually increase oil production by 400,000 barrels per day each month.Major energy consumers such as the US, Europe and China are putting pressure on the cartel because they are concerned about the risk of inflation to the economic recovery. Following the news, Brent crude oil reached US$82 a barrel for the first time in three years. Oil-producing countries fear a rebound in the Covid-19 epidemic that could trigger a shutdown of the economy this winter and thus another drastic drop in oil demand. US shale producers have also warned that they will not increase their production. They are facing pressure from investors to remain cautious after last year’s price drop. A shortage of natural gas in Europe has exacerbated the tight oil market, with companies forced to turn to crude oil for power generation.

Agriculture. While Russia is currently developing a common agricultural policy with Belarus, it is impressive to see how far the country has come in 30 years on this issue. After the collapse of the Soviet Union, the country used oil money to import most of its food. A decade later, when Vladimir Putin came to power, 50% of the food was imported and “food security” became a top political priority. A program of development through national projects to stimulate investment was put in place and this policy would be reinforced following the economic crisis of 2008. In 2014, European and American sanctions caused a sharp devaluation of the ruble making Russian exports more competitive. Moscow responded with counter-sanctions, supporting its agricultural sector by banning most food imports from the West. For several years now, Russia has been among the top 10 exporters of cereal crops (barley, corn, rye, oats). But it is especially in wheat that it has established itself as a key player. From 2017 to 2019, it was the leading exporter, accounting for about 20% of the world market.

Russia-Germany relationship. Elections were held in Germany on September 26 to elect a new parliament. The Social Democratic Party (SPD) surprised everyone by winning with 25.7 per cent of the vote, while the conservative CDU/CSU bloc received 24.1 per cent, its worst result ever. The position of chancellor will most likely be held by Olaf Scholz of the SPD or Armin Laschet of the CDU/CSU bloc. German elections are followed very closely in Moscow as the prospect of cooperation between the two countries is important. Germany has become in three decades the economic heart of the EU and the fourth largest economy in the world. On October 2 German Unity Day was celebrated, marking the reunification of the Federal Republic of Germany with the German Democratic Republic in 1990. Vladimir Putin took the opportunity to reaffirm that “Germany’s unification became an important historical event that marked the end of the Cold War in Europe, as well as the beginning of a new relationship between our countries”.

Russian elections. On September 17, 18 and 19, elections were held for the Russian State Duma, the lower house. The ruling party, United Russia, achieved 49.82% of the vote, followed by the Communist Party (18.93%) and the Liberal Democratic Party of Russia (7.55%).This victory means that United Russia will have more than two-thirds of the deputies, allowing it to continue passing legislation without having to rely on other parties. Accusations of fraud were made about these elections, the most serious of which concerns electronic voting. In the city of Moscow, when results are considered without taking into account the electronic vote, the Communist Party won. When electronic voting is added, United Russia wins. According to the association GOLOS (which is not favoured by the Kremlin), several explanations of electoral behavior and sociology can explain the over-representation of United Russia votes in the electronic system. As for the most recent American presidential election, we are seeing a strong distrust of electronic voting when we are not satisfied with the result.