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Russian Equities Strategy - Through a glass darkly

Yesterday, we published Russian Equities Strategy - Through a glass darkly. Excerpts from this report are given below.

The start of 2014 was a rollercoaster ride for the Russian stock market, as the EM-led slide was followed by a geopolitical shock from Ukraine. As the risks emanating from the latter linger on, the impact on the Russian economy cannot be dismissed as negligible. We cut our YE14 target to 1,400 and think further headroom for the Russian stock market is limited. We therefore revert to the generally neutral view we advocated prior to the January-March drop.

Geopolitics weighs on risk profile. The election of Petro Poroshenko as president was the first step along the winding road toward Ukrainian politics returning to normality. Yet, of itself, it hardly resolves the issues facing the nation, and in particular, in the eastern provinces, where the armed standoff has been spiralling upward. The unrest in Ukraine poses a multifaceted challenge for Russia.

2014 economic outlook unexciting. In the first months of the year, the CBR increased its key rate 200bp to 7.5% amid intense pressure on the rouble. This added an extra headwind to an already markedly slowing growth momentum. We now expect zero GDP growth in 2014 and USDRUB at 36.00.

Euroclearability in the wings. The confusing recent newsflow notwithstanding, we expect Euroclear to open Russian equities accounts this year, and probably sooner than later.

Dividends. Combining one of the lowest payouts in EM (23% vs. 49%) with one of the highest dividend yields (4.5% vs 3.2%), MSCI Russia seemingly commands a favourable balance of risk in terms of dividend outlook.

Our fundamental ratings and target prices for these stocks can be found in the Market Data section of this report.

Alexey Zabotkin, Sergey Galkin, Ilya Piterskiy
VTB Capital analyst

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