20180411-高盛-EM_Strategy_Views_Russia_-_showing__value_,_but_previous_troughs_are_far_below_current_27页_1mb

EM Strategy Views - Russia Summary

Core Content

This report provides an analysis of the current state of Russian assets within the context of emerging market (EM) investments, comparing them to historical data from 2014 and assessing their valuation relative to fair value models.

Main Points

• Volatility and Value Signal:
  Russian assets have shown signs of being "inexpensive" relative to fair value models, particularly in FX and credit. However, these signals are not as severe as those seen in 2014. The recent RUB depreciation and CDS widening suggest that the value signal is more muted compared to the 2014 crisis.

• Equity Valuation:
  Russian equities trade at a P/E multiple that is double the level seen in December 2014. Despite this, equities are naturally FX-hedged due to USD revenue exposure from commodities, which historically has helped them weather volatility better than other assets.

• Local Bonds:
  Local bonds continue to screen as inexpensive on a real rate basis, similar to their performance since 2014. They have historically shown the best "bounce back" after market downturns, making them a preferred asset class for positioning in a recovery scenario.

• Credit Spreads:
  Russian CDS levels are currently tighter than in 2014, both in absolute terms and relative to EM peers. The recent 40 bp widening has retraced some gains, but the credit risk remains relatively low compared to the past crisis.

• FX Dynamics:
  The RUB has moved into "inexpensive" territory, but to match the 2014 premium, it would need to depreciate by an additional 20%. The RUB's depreciation has been cushioned by oil price stability in USD terms, which reduced the impact of FX movements on the economy.

• Fiscal and Growth Outlook:
  Russian corporate profits remained strong in 2014, only declining in 2015. Current earnings are still below historical peaks, indicating that the market may still have room for recovery. The macroeconomic backdrop is more stable now, with improved growth expectations and lower inflation, which supports tighter credit spreads.

• Investor Positioning:
  EM-benchmarked investors are overweight Russian assets, particularly in fixed income and equity. This overweight position suggests that the market may be overbought, and a correction is possible.

Key Information

• Market Performance (Jan 1 - Feb 28):

  • Russia ranked last in FX, 5th in credit, 2nd in local bonds, and 4th in equity.
  • RUB was the worst performer in FX, while local bonds and equity showed better performance.

• Market Performance (Feb 28 - Apr 10):

  • Russia continued to underperform, with FX and credit at the bottom of the EM spectrum.
  • Local bonds and equity showed some recovery, but the overall market remains volatile.

• 2014 Historical Context:

  • The 2014 crisis was more severe in terms of FX and local asset performance.
  • Credit spreads were much wider in 2014, but they have since reverted to tighter levels.
  • The RUB was more undervalued in 2014, but the current depreciation is not as extreme.

• Valuation Comparison:

  • FX: RUB is 3% inexpensive compared to fair value, but 20% richer than the 2014 trough.
  • Equity: Russian equities are 11% inexpensive, but 50% richer than the 2014 trough.
  • Local Bonds: 220 bp inexpensive compared to fair value, but 130 bp below the 2014 peak.
  • Credit: 33 bp inexpensive, but 250 bp tighter than the 2014 levels.

• Investor Overweighting:

  • EM-benchmarked investors are significantly overweight Russian assets, making the near-term outlook uncertain.
  • Russia is the third most overweight EM market after Brazil and India.

Asset Class Insights

• Equities:

  • Naturally FX-hedged due to USD-based commodity revenues.
  • Still trade at a discount to EM peers, but not as steep as in 2014.
  • Materials sector has seen strong EPS growth, while energy remains weak.

• Credit:

  • Russian CDS is currently tighter than in 2014, but still offers value compared to EM peers.
  • The recent widening suggests a shift in inflation and growth expectations, but the risk premium remains low.

• Local Bonds:

  • Remain the most "inexpensive" asset class in Russia, with a real rate differential of 1.8% vs. EM peers.
  • Historically, local bonds have shown the strongest recovery after market downturns.

• FX:

  • The RUB has depreciated significantly, but not enough to match the 2014 levels.
  • Would need an additional 20% depreciation to match the 2014 premium, but the current situation is less severe due to oil price stability.

Conclusion

• Russian assets are currently showing signs of value, particularly in FX and credit.
• However, the 2014 crisis was much more severe, with deeper valuations and higher volatility.
• The current environment is more stable, with improved growth and inflation dynamics, which supports tighter credit spreads and lower FX volatility.
• Despite the potential for a bounce back, the highly uncertain macro environment and heavy positioning keep investors on the sidelines.
• Local bonds are the preferred asset class for a recovery, but the overall market remains volatile and subject to further risks.