18 February 2019
The Russian stock market has been a standout performer this year, helped partly by the ruble's recovery.
The Russian stock market has been a standout performer this year, helped partly by the ruble's recovery.

Russia market may continue to outperform next year

The US equities rally may have grabbed most of the investor attention in recent weeks, but let us not forget that the Russian stock market has also been a strong performer this year.

Bouncing more than 50 percent from the year’s low, the Russian market has outshone global peers in 2016 even as the nation suffered from Western sanctions and depressed oil prices.

Moscow has suffered economic sanctions since its military intervention in Crimea in 2014. The ruble plunged considerably and triggered social turmoil, raising fears that the Russian economy may fall apart.

Falling oil prices during the period added to the country’s economic woes as energy is one of the pillar industries.

In response to the crisis, the Russian central bank adjusted interest rates aggressively to attract more deposits from the private sector. It also improved the transparency and regulation of its financial sector.

The country also ramped up agricultural output, which helped offset part of the export decline due to soft oil prices.

The economy finally stabilized and bottomed out this year.

The ruble has been recovering gradually, now trading 19 percent higher against the dollar compared to the level at the start of the year, reflecting a return of investor confidence.

Looking ahead, a number of factors will support further gains in Russian equities.

OPEC nations recently reached the first oil output cut agreement in eight years. Global crude oil market is expected to become more balanced next year if the output cut can be implemented smoothly.

Donald Trump’s US election win may also benefit Russia as the president-elect appears to favor a mutually beneficial relationship with Moscow, boosting the likelihood of an end to international sanctions.

Trump has named Exxon Mobil CEO Rex Tillerson as his Secretary of State. Tillerson has over 40 years experience in the oil industry and he has very close ties with Russian President Vladimir Putin. Given this, he might play a key role in changing US-Russia relations for the better.

Meanwhile, drawn by cheaper wages and tax benefits, Germany has been investing heavily in Russia. According to data from the German Bundesbank, German firms made direct investment of 1.73 billion euro in the first half of this year, almost as much as the full-year 2015 level.

Likewise, other Western capital may also be attracted to Russia for the same reason.

Global equity markets are becoming more polarized, as investors shun regions like Western Europe where political uncertainties are mounting.

Amid this situation, improving economies like Russia may benefit from fund flows.

For investors, another interesting point about diversifying into Russian equity funds is the stocks’ low correlation with other markets.

This article appeared in the Hong Kong Economic Journal on Dec. 16

Translation by Julie Zhu

[Chinese version 中文版]

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Founder and Managing Director of Pegasus Fund Managers Ltd.

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