A victory for Mitt Romney in this year’s U.S. presidential elections may drive Russian stocks down as much as 10 percent, according to Citigroup Inc.
Romney was confirmed yesterday as the Republican Party’s candidate to stand against President Barack Obama in the November election.
The former governor of Massachusetts sees Russia as America’s “No. 1 geopolitical foe” and has criticized Obama’s delay of plans for a missile defense system in eastern Europe. With two thirds of the Russian stock market’s freefloat owned by foreign investors -- about half in U.S. funds -- changing relations between the two countries are likely to affect the market, according to a Citigroup note today.
“Romney is calling Russia U.S.’s number one geopolitical foe so clearly Romney’s victory would mean a downturn for the Russian market, at least initially,” Kingsmill Bond, Citigroup’s chief Russia strategist, said by phone today.
In case Romney as president pursues a “Cold War-style agenda,” Citigroup expects a “powerful reaction” from President Vladimir Putin, according to the note.
“If Obama is concerned about restraining those domestic forces which would unleash cold war rhetoric, then it appears that Romney would encourage this process,” Citigroup analysts said in the report.
During his July 31 speech in Warsaw, Poland, as part of the candidate’s six-day international trip, Romney criticized Russian leaders, saying their “once-promising advances toward a free and open society have faltered.”
Romney’s intention to reduce regulation and increase domestic production of oil and gas would also decrease European energy reliance on Russia, according to Citigroup.
An Obama victory remains the “base-case” scenario, Citigroup said in the note.
Russian equities trade at the cheapest valuations among 21 emerging markets tracked by Bloomberg. The Micex trades at 5.3 times estimated earnings after gaining 2.5 percent this year. That compares with 9.9 times for the MSCI Emerging Markets Index, which has added 4 percent.
The Micex fell 0.9 percent to 1,437.14 by the close in Moscow, the lowest level since Aug. 20.
A Romney victory would be “beneficial” for Russia’s defense companies, Citigroup said. Stocks “most at risk” would be those favored by Western investors, including OAO Magnit, Russia’s largest food retailer, OAO Sberbank, Russia’s biggest lender, OAO Novatek, OAO Mobile TeleSystems and Globaltrans Investments Plc, according to Citigroup.
MTS dropped 1.6 percent to 240.91 rubles. Novatek fell 1.4 percent to 361.60 rubles.