Page 23 - BNE_magazine_05_2020

bne May 2020 Companies & Markets I 23
Russia oil prices vs RTS index
ave cost oil $/bl
implied RTS: oil x 20
RTS (eop)
over/under- value
January
63.7
1273
1560
287
February
55.7
1114
1360
246
March
32
640
990
350
April*
21.2
425
1066
641
Oil recovers to $35
35
700
Oil recovers to $40
40
800
Oil recovers to $45
45
900
Oil recovers to $50
50
1000
Oil recovers to $55
55
1100
Oil recovers to $60
60
1200
Source: MOEX, bne IntelliNews
* first 15 days of April
Over the first four months of this year the price of oil has crashed. The value of the RTS index has also plummeted, but a lot less fast and a lot less far than oil. Using the rule of thumb and the RTS is currently about 600 points overvalued.
The average price of oil over the first 15 days of April was only $21.2, down from $63.7 for the month of January. Applying the x20 rule, April’s price of oil implies the RTS should be
a mere 641, against its actual value of 1,129.5 on April 15. In other words, the current RTS value is twice what it should be if compared with the price of oil.
The RTS at 600 is extremely low, if compared to other factors that determine a stocks value, like earnings per share. Even in the depths of the 2014 oil shock, when oil prices also sank to around $30, the lowest the RTS fell to was just above 800 and then for only a few days before it rebounded to around 900.
Clearly valuing stocks is very difficult at the moment. It appears that investors are not valuing share prices on basis of current oil prices, but what they expect oil prices to recover to later in the year when the coronavirus burns out and life goes back to a semblance of normality.
Various forecasts for oil prices have been offered and guessing oil prices remains a mug’s game, as oil remains the most volatile of all the commodities. Gaming out the various possibilities with a table of possible prices and implied RTS values means the market at current valuations expects oil to return to about $50: the RTS at 1,129 on April 15 implies an oil price of $56.4, whereas the actual price of oil on that day was $28.
“It appears that investors are not valuing share prices on basis of current oil prices, but what they expect oil prices to recover to later in the year”
Even this looks a bit rich. Several commentators have predicted that oil will recover to $40 and the budget assumption is also still $42, which implies the RTS index will reach only 800, which some 250 point less than it is now. Other industry figures have said that oil will recover to $55
by the end of the year, which implies the RTS will rise to 1,100, which is where it is now.
During the last oil shock in 2014 it took about two years for the RTS to breach 1,200 and fully five years for it to get to 1,600. Russia’s economy is in much better shape than it was in 2014, so in theory the recovery will go a bit faster this time. But
the world still needs to work through how all the rescue and stimulus plans are going to work and there is still plenty
of time for something to go badly wrong.
Utilities, formerly an investor favourite in the first two months of this year, also remain depressed, having lost 22% YTD as
of April 17. The problem with the sector is that previously, investors had expected sector-friendly adjustments to tariffs, but with a recession looming those tariff changes are less likely now. And financials have lost 34% over the same period. Banks are a proxy for rising incomes and economic growth, but again, neither of those things are likely to happen now for a few years.
Analysts at the investment banks are still upbeat , simply because even if the medium-term outlook remains grey, they still expect more “dead cat bounce” in the short term. They point to the good news on OPEC++ and the flattening infection curves as indicators that the market may turn soon.
“Markets may also take heart in headlines that Saudi Arabia and Russia have signalled intent to further reduce output, citing an inadequate price reaction to the latest OPEC+ deal,” said Mark Bradford, a strategist with BCS Global Markets. “The recent downturns offered players an opportunity to embrace headlines that implied COVID-19 may be at least approaching peak, as more hard hit countries prepared to slowly re-open their economies.”
Oil prices will weigh on valuations
But confusion reigns. While stocks are unquestionably cheap, if you compare the current valuations to the oil price then the RTS looks more overvalued than at any time in the last five years.
Traditionally there has been a fairly tight relation between oil prices and the cost of oil: a simple rule of thumb of Russian stock watching is the value of the RTS is usually roughly twenty times the price of oil. If the price of oil is $100 then the RTS should be 2,000. In the past this rule has worked pretty well.
www.bne.eu