Page 22 - BNE_magazine_04_2019

22 I Companies & Markets bne April 2019
bne:Funds
International investors remain overweight in Russian stocks, but oil sector loses its appeal
Ben Aris in Berlin
International investors remain overweight in Russian stocks and believe the risks of lower oil and more sanctions are already priced in, but after stellar returns last year, inves- tors are now underweight in Russian oil stocks, BCS Global Markets said in a note following a survey of its clients.
The oil sector has been a bit of rollercoaster ride in recent years. Following the collapse of the oil price at the end of 2014, the VTB Capital (VTBC) oil sector index was down over 40% by the end of that year. The following year was one of pain as Russia’s economy tried to recover from the shock of the deep associated ruble devaluation, and the oil index was flat y/y in 2015.
However, from 2016 the salutary effects devaluation had on costs, which are priced in rubles whereas income is in dol- lars, saw the oil index soar and return near 50% y/y. 2017 was more difficult for oil stocks as oil prices fell again into the $40s, but as the year came to an end they started to rise strongly, finishing 2017 with an overall gain for the sector of about 10%.
Last year was another good one for oil stocks as price growth continues, with oil rising from an average price of around $65 in the first half of the year to around $75 in the second. How- ever, as the year came to an end oil prices started falling again and in January the average oil price fell to $56.
That has taken the wind out of the sails for portfolio investors looking at oil. However, there is still some upside left as oil prices recovered in February and were $66 for a barrel of Brent at the time of writing. Bankers are assuming prices will return to an average of $65 this year, but much will depend on if the production cuts deal with OPEC will be extended at a meeting in Vienna scheduled for April.
In the meantime BCS reports that while three quarters of its clients were overweight Russian oil stocks in November, now 60% are either flat or underweight. It seems the oil recovery story has run its course. In November half of some internation- al investors’ portfolios were made up of oil and gas stocks.
Investors have switched to more domestic stories and currently the utilities sector is the best performing, up 14% YTD accord- ing to BCS, followed by the financial sector up 12% YTD.
www.bne.eu
“The cautious view on future oil prices is the key reason for the downgrade. Lukoil and Tatneft prefs are the most popu- lar names in Russian O&G. Gazprom is becoming interesting thanks to resilience, low multiples. Domestic players are now the top picks in Russia. Rosneft is the key outcast due to write-offs,” Kirill Tachennikov, director and senior analyst at BCS Global Markets, said in a note.
Despite the switch out of oil, Russia remains portfolio favou- rite from the leading emerging markets (EMs), partly because of the high dividend yields, partly because of the low valua- tions and partly because investors believe that the risks from potential new US sanctions have already been priced in.
“Our institutional clients still prefer the Russian market to that of other EM countries. Most of them said they are overweight in Russian stocks v other EM companies’ stocks. They consider
“Our institutional clients still prefer the Russian market to that of other EM countries. Most of them said they are overweight in Russian stocks”
risks to be priced in. We believe that low valuations combined with high dividend yields will keep the Russian stock market resilient against possible new US sanctions and other prob- lems typical of emerging markets,” Tachennikov added.
Investors are still holding names like the privately owned Lukoil that has seen its share price almost double last year; privately owned Surgutneftegaz prefs, thanks to its $40bn cash pile, interest on which account for about three quarters of its dividend payments; and, independently owned gas pro- ducer Novatek. The state-owned bluechips have been tread- ing water, as bne IntelliNews recently reported in “Sberbank retakes Russia’s equity King of the Castle title.”
Sectors connected to the consumer are coming back into focus with the traditional favourites catching the most attention, including: state-owned retail bank Sberbank, internet search