Page 82 - RusRPTMar19

8.3 Stock market
8.3.1 Equity market dynamics
International investors remain overweight in Russian stocks, but oil sector loses its appeal
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, investors are now underweight 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 dollars, 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 started to rise strongly finishing 2017 with a overall gain for the sector of about 10%.
Last year was another good one for oil stocks has 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. However, 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 international investors’ portfolio was 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 according to a BCS, followed by the financial sector up 12% YTD.
“The cautious view on future oil prices is the key reason for the downgrade. Lukoil and Tatneft prefs are the most popular 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’s favourite from the leading emerging markets (EM) partly because of the high dividend yields, partly because of the low valuations 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 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 problems typical
82 RUSSIA Country Report March 2019 www.intellinews.com