Russia’s stockmarket has raced ahead of Brazil, India and China in recent months, with the RTS index up 44% since September. This reflects the oil and gas sector’s dominance of the index, so the outlook for black gold is the main issue investors in Russia need to consider.
For now, at least, the weak dollar and jitters over “a long hot summer of discontent across the Middle East” should “provide steady support for the oil price” and thus investor sentiment towards Russia, according to Chris Weafer of Uralsib. This is just as well, “as the domestic story is not yet strong enough to sustain a rising market”.
The recent increase in inflation has been one of the sharpest in the last decade, says Morgan Stanley. The latest reading was 9.5%. It is eroding incomes and crimping spending; real disposable income growth shrank by 5.6% year-on-year in January, for instance. Overall growth is set to come in at 4%-5% this year, a marked slowdown on last year. What’s more, says Capital Economics, the central bank “is looking increasingly behind the curve when it comes to tightening monetary policy”. With elections approaching, the government is loath to tighten fiscal policy, which also suggests inflation could stay stronger for longer. Nor has general political risk gone away, which explains why the Russian market is still on a single digit p/e ratio. The authorities ignore property rights when it suits them. Investment in Russia, says William Browder of Hermitage Capital Management, “is a total crap shoot”.
With the underlying picture not looking especially promising, the Russian market looks all the more dependent on the outlook for oil and global growth. So while the market looks fine for now, any sign of demand for oil slowing, or supply fears easing, would raise the prospect of a rush for the exits.