July 8 (Bloomberg) -- Citigroup Inc. raised Russian equities to overweight, citing low valuations for making them its preferred pick in central and eastern Europe, the Middle East and Africa.
Russian equities have the cheapest valuations among 21 emerging markets tracked by Bloomberg. The Micex Index trades at 5.1 times its 12-month estimated earnings, having lost about 8.5 percent this year, compared with a multiple of 9.5 for the MSCI Emerging Markets Index, which is down 14 percent.
Oil prices and dividend yields are the key drivers for the Russian market, the Citi analysts, who have an overweight recommendation on the nation’s financial and energy sectors, said in an e-mailed note. The dollar’s recovery will push Russia’s inflation higher, supporting resource-linked stocks over equities dependent on domestic consumption, they said. Slowing economic growth means the central bank won’t cut rates, according to the report.
“Russia sits as our preferred CEEMEA market for the second half of 2013 due to valuation reasons,” Citi strategist Richard Schellbach said in the note. “We note that investor skepticism towards the market is high, and underperformance relative to emerging markets has continued throughout the first half of 2013.”
Russia’s economy grew 1.6 percent in the first three months, the slowest pace since 2009. Bank Rossii held its refinancing rate at 8.25 percent on June 10 after inflation accelerated for a second month in May to the fastest pace in 21 months.
Citi rates South African and Turkish stocks neutral on “shaky” social and political backdrops and valuations, and has an underweight recommendation for Poland and Egypt. Analysts are also neutral on Czech and Hungarian equities.
Latin America is Citi’s least preferred emerging-market region where it sees “further disappointments” from the Brazilian market in the next few months on “weak” economic data, the foreign-exchange effect on earnings and political unrest. Citi sees Brazil rebounding in the first half of 2014 and Mexico offering a “safe play” in the region with the possibility of underperformance in the near term as fixed-income and foreign-exchange markets adjust to higher U.S. bond yields, according to the note.
Citi prefers Asia among emerging markets, citing benefits from expanding central bank balance sheets, current account surpluses, “large” reserves and space for further monetary easing. The recent drop in China’s equities amid the liquidity crunch is a buying opportunity, the analysts wrote.
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