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.
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