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Russian review: what the thawing of US relations means for investors

Russian review: what the thawing of US relations means for investors

Russian president Vladimir Putin has been sending clear signals he’s willing to mend ties with the US following Donald’s Trump election.

Could this signify a turning point in Russia’s strained relationship with the West? We asked experts what this could mean for its economy.

Michael Levy, Baring Asset Management, emerging markets equity manager

Our positive outlook for the Russian equity market is supported by a broad-based set of factors that we believe bode well for investors. As we take a longer-term view, our optimism is greatest for companies that benefit from structural growth trends that can support healthy multi- year earnings delivery.

Russia has many such firms with world-class franchises that operate in growth areas where market penetration is still low, such as food retailing, healthcare, information technology and financial services. In the shorter term, if the more constructive outlook for oil and commodities persists, this should also support opportunities in the more established extractive industries.

It must also be acknowledged that Russia will likely benefit from Donald Trump’s victory, which heralds prospects for improved bilateral relations and a possible easing of economic sanctions. This could lead to better financing conditions for Russian businesses and present new opportunities within the equity market.

Last, focused management and cost discipline by corporates over two years of tough trading conditions is starting to come through in improved earnings. At a time when valuations trade at a discount to global emerging market equities, this presents an attractive buying opportunity. We expect to see a return of inflows from emerging markets investors who have been underweight Russia in the past two years.

Kaan Nazli, Neuberger Berman, emerging market debt economist 

Russia stands to be one of the main beneficiaries of Donald Trump’s win in the US, which will open the doors for renewed dialogue on Syria and the Ukraine, and could result in the ultimate easing of sanctions. This should help at a time when fiscal pressures have been building.

The government decided further cuts to social spending would be too painful ahead of 2018 presidential elections and with the current level of oil prices, one of the two reserve funds will likely hit zero by the middle of next year while net debt issuance will pick up visibly. On the positive side, inflation is on a downward trajectory, thanks mainly to the central bank’s cautious policies.

The balance of risks coupled with valuations makes us negative on Russian hard currency sovereign debt, while we maintain a positive outlook on the rouble with real yields offering compensation in a disinflationary environment.

Colin Croft, Jupiter Asset Management, emerging Europe equity manager

Russia has been one of the best-performing major equity markets in the immediate aftermath of the US election result. This is in large part due to hopes that geopolitical tensions between Russia and the West may ease under a Trump presidency, given Trump’s conciliatory tone towards Russia during the campaign.

When I was in Moscow last month, one of the key worries among investors whom I talked to was the risk that a Clinton win could see the US take a tougher line in Syria, and potentially impose additional sanctions on Russia.

The odds of this seem lower in the light of the election result. Provided that the oil price holds reasonably steady, which it has so far, this should be enough to drive a rally, given how underowned the Russian market is by global investors.

I think there is a good chance the new president will at least attempt to mend fences with Russia, in much the same way that Obama tried to with his ‘reset button’ back in 2009.

If there is even a possibility that tensions might ease or sanctions might be lifted, many investors who have been on the sidelines will be tempted to buy into a market whose dividend yield, about 5%, is among the world’s highest in the world.

This article was originally published in the December issue of Citywire Americas. To sign up to receive our free magazine, follow this link.

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