As 2014 was drawing to a close, one may not have chosen Russia as a top emerging-market investing destination for 2015. A decline in the price of oil, along with an economic slump and political issues (see: Ukraine), offered up a triple threat of headwinds that have contributed to Russian stocks marking 23 straight quarters of capital outflows.
However, investors are now showing signs that pessimism may be a thing of the past. The Russia segment of the BRICs Building motif, for example, which has a 10.9% weighting, has gained 32% in the past month.
(The overall motif has increased 16.1% in the past month. In that same time, the S&P 500 has risen 2.4%. Over the past 12 months, the motif has gained 23.4%; the S&P is up 15.1%.)
Part of the new-found hope has apparently arisen from the investment community’s belief that the ugliest outcome has been totally priced in.
As Bloomberg recently reported, while the economy is still forecast to shrink about 4%, Russian stocks were up 19% by mid-April this year, while the ruble gained 13% after a 46% drop in 2014. Sanctions linked to the Ukraine conflict and plunging oil prices have spurred capital flight, but stock prices probably already reflect the worst possible scenarios, according to Otkritie Asset Management.1
“The Russian market’s low valuations already take into account all the negative factors including the economic decline, oil prices and political risks,” Sergey Vakhrameev, a money manager at GL Financial Group, told Bloomberg. “The worst seems to be behind us.”
A note earlier this month by Citibank also was bullish on future upside. Though the investment bank cautioned that the potential for a rally is “nowhere near” as large as the valuation discount vs. emerging markets, “we are almost certain that Russia will eventually return as a destination for investors, and when this happens, sharp upward moves could be seen given the market’s extreme value and under-owned status.”
As for fellow BRIC nation China, the runup in stocks there has been helped by the government’s attention toward breathing more life into a slowing economy.
Bloomberg reported earlier this week that China’s stocks rallied the most in three months amid speculation the government is considering merging state-owned enterprises and taking more steps to support economic growth.2
According to the report, China may cut the number of centrally administered SOEs to 40 from the current 112 through mergers and restructuring. The central bank is discussing adopting unconventional policies to reinvigorate the economy, including making direct purchases of local government bonds from the market, Bloomberg said.
That report followed news a week earlier that the People’s Bank of China lowered the reserve requirement ratio for all banks by 100 basis points, marking the deepest single reduction since 2008 and the second industrywide cut in two months.
China’s own investors haven’t wanted to miss this rally, either. Indeed, a recent Wall Street Journal article pointed out that concern is growing over a surge in bets by mom-and-pop investors using cash borrowed from brokers to pile into – and extend — China’s booming stock market.3
Margin lending has more than tripled in the past year to a record $274.6 billion, according to WIND Information, a provider of financial data. The Journal noted that the upsurge echoes past investment crazes among Chinese speculators, who have long shown a penchant for rushing into whatever is yielding the highest returns, from real-estate and wealth-management products, to bitcoin and online money-market funds.
That may introduce a note of caution into a market that has seen a rise of more than 40% already in 2015. On the other hand, many investors may bet that the risk/reward surrounding China is still more attractive than the promise currently offered by developed markets.
1Ksenia Galouchko, “Russia Stock Analysts Turn Bullish as Earnings Slump to 2009 Low,” Bloomberg.com, April 12, 2015, http://www.bloomberg.com/news/articles/2015-04-12/russia-stock-analysts-turn-bullish-as-earnings-slump-to-2009-low, (accessed April 27, 2015).
2Kyoungwha Kim, “China’s Stocks Rise to Seven-Year High on SOE Merger Speculation,” Bloomberg.com, April 26, 2015, http://www.bloomberg.com/news/articles/2015-04-27/china-s-stock-index-futures-rise-before-industrial-profits.
3Chao Deng, “Debt Builds In China Stock Rally,” wsj.com, April 23, 2015.