After almost a year on the slide, Russia’s RTS index has rebounded. The index has gained around 40% from its January low to just under 700, although that still leaves it almost 73% down on last spring’s record peak. The oil-heavy market’s recovery has been underpinned by the new-found stability in the oil price. Along with higher interest rates, this has helped steady the ruble after a 30% slide against a basket of dollars and euros.
The recovery in the ruble and oil prices has eased concerns over the private sector’s foreign debts and the government’s finances; weaker oil revenues and government spending to alleviate the crisis will lead to a budget deficit of about 7% this year. The government has also reassured observers with a renewed emphasis on fiscal discipline, says Lex in the FT. Earlier signals had suggested it would “bail out corporate all-comers”.
Still, the overall backdrop is hardly auspicious. A clampdown on credit by banks hit by the global crunch is prompting companies to ditch workers and is denting consumption. In February, retail sales slid year on year for the first time in nine years, says Lex. Capital Economics thinks the economy could shrink by 5% this year, the worst fall since the 1998 crisis.
Then there’s the limited upside in the oil price, “the key driver of Russian equities”, say Daniel Salter and Sergey Galkin of ING. With the global economy unlikely to recover soon, it is “premature to get excited about a new bull market in commodities”. This year’s consensus forecast of a 30% drop in Russian earnings, moreover, seems optimistic: a fall of 42%-50% is more realistic.
Throw in the fact that the threat of political interference continues to leave a “nasty taste” in investors’ mouths – Norway’s Telenor has now become involved in a row over its investment in Russia – and the market’s low p/e of around 6.4 is unlikely to close the gap with the emerging market average of ten. So while this “relief rally” may not be over just yet, it’s unlikely to turn into a sustainable upswing. It’s too early for a “straight-line recovery”, say Salter and Galkin. Expect the index to be capped at the 800 level this year.