JPMorgan Goes From Sell to Buy and Back on Russia

Ukraine air crash
A member of a local militia guards remnants of Malaysia Airlines flight MH17 during a visit by monitors from the Organisation for Security and Cooperation in Europe (OSCE) in Grabovo, Ukraine. Photographer: Rob Stothard/Getty Images

Just a month after lifting its call on Russia stocks to buy, JPMorgan Chase & Co. reversed course, telling investors to sell as the market plunged after the U.S. imposed more sanctions and an attack on a civilian jet deepened tensions in Ukraine.

The flip-flop highlights how volatile markets have become in a country that’s been mired in a conflict in neighboring Ukraine for months. The Russian Market Volatility Index, which reflects traders’ projections for future price swings in equities, jumped 9.9 percent last week to the highest since May 12 as the benchmark Micex index sank to a seven-week low.

In cutting its call, JPMorgan joined Deutsche Bank AG and Barclays Plc turning bearish. Deutsche Bank AG predicted a decline of about 10 percent by year-end while Barclays Plc said stocks could see a correction. JPMorgan’s analysts led by Adrian Mowat said they reduced Russian stocks to underweight, the equivalent of sell, on heightened international tension, stronger sanctions linked to the Ukraine conflict and declining oil prices.

“The single biggest risk for the market is further sanctions on Russia, and if that risk was reduced we would be inclined to upgrade our recommendation,” David Aserkoff, a JPMorgan analyst in London, said by phone on July 18. The bank had raised its recommendation to overweight, the equivalent of buy, on June 18, citing the “fading” of the Ukraine crisis.

The Bloomberg Russia-US Equity index declined 4.7 percent last week to 87.85. The Micex sank 5.2 percent. Stocks tumbled as the U.S. imposed new sanctions on Russian companies and the crash of Malaysian Airlines flight MH17 in Ukraine increased tensions in the region.

‘Substantive Events’

President Barack Obama blamed Russia’s support of separatists for the violence in Ukraine that led to the downing of the airliner and called for an immediate cease-fire to allow an independent investigation. U.S. authorities have concluded the passenger jet was shot down by a Russian-made surface-to-air missile fired from an area controlled by pro-Russian separatists, Obama said July 18. All 298 people on board were killed. The rebels deny they shot down the plane.

“Market volatility is currently driven by geopolitics,” the JPMorgan analysts wrote in their July 18 report. “U.S. financial sanctions and now the MH17 are substantive events that have escalated tensions further.”

Investors pulled $22.5 million out of the Market Vectors Russia ETF last week, bringing the total in July to $29.2 million. The biggest U.S. exchange-traded fund that holds Russian shares is poised for the biggest monthly outflow since February, according to data compiled by Bloomberg. The ETF plunged 5.6 percent to $25.30 last week.

Deutsche Bank

United Co. Rusal, a Moscow-based aluminum producer, rose 2.4 percent to HK$3.80 in Hong Kong trading as of 12:13 p.m. local time.

Russia-dedicated stock funds posted $96 million of outflows in the week ending July 16, bringing the total this year to $781 million, compared with $1.9 billion in the same period of 2013, Cameron Brandt, research director at EPFR Global, a Cambridge, Massachusetts-based company that tracks fund flows, said by phone on July 18.

John-Paul Smith, the Deutsche Bank strategist who predicted Russia’s 1998 market crash and accurately called for a May rebound in the country’s stock market, said on July 17 that the Micex Index could lose 10 percent by the end of this year as sentiment erodes amid international sanctions.

“The new measures bring the U.S. closer to sectoral sanctions and put pressure on the EU to equally expand its own sanctions,” Barclays London-based analysts including Andreas Kolbe wrote in a July 17 note to clients. “Neither positioning technicals nor valuations offer a significant buffer for Russian assets at this stage, which leaves asset prices vulnerable to a correction in the near term.”

Ian Scott, head of equity strategy for Barclays in London, said by phone on July 18 that the bank has no specific rating for Russian equities and is overweight in emerging markets.

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