Societe Generale Private Banking Suisse SA is unimpressed by the world-leading rally in Russian assets.
The wealth manager overseeing $115 billion recommends investors stay away from the country as low oil prices will weigh on its stocks, bonds and currency, while an “extremely heavy reliance” on commodity exports limits longer-term economic prospects, according to Alan Mudie, the company’s Geneva-based head of investment strategy.
“We don’t see any potential for the type of economic-reform programs that we identify in other emerging markets,” Mudie said in an interview on Tuesday in Prague. “We still view the visibility for investors as being extremely limited.”
Last year’s selloff in oil has pushed the economy of the world’s largest energy exporter to the brink of a recession while international sanctions linked to the conflict in Ukraine have cut off access to foreign funding and stoked capital outflows. Even as the ruble has rallied the most in the world this year, recovering 20 percent against the dollar, it remains down 29 percent over the past 12 months, the worst performance among major currencies tracked by Bloomberg.
A cease-fire in eastern Ukraine and oil prices that have stabilized above $55 a barrel have helped improve investor sentiment toward Russia. The dollar-denominated RTS stock index has soared 31 percent since the end of December and the sovereign’s dollar bonds have returned 13 percent during the span, the best rally among 84 emerging and developed nations tracked by Bloomberg indexes.
Yields on Eurobonds maturing in March 2030 were little changed at 3.64 percent by 5:06 p.m. in Moscow, down from as high as 7.64 percent in December when investor flight peaked. The ruble appreciated 0.6 percent to 50.60 per dollar, after earlier reaching 50.2560, its strongest since November.
The markets have rallied even as the Finance Ministry in Moscow predicts capital outflows of $90 billion this year, down from a record $154 billion estimated for last year. The central bank sees growth contracting as much as 4 percent this year after a 0.6 percent expansion in 2014.
“We reviewed the situation and decided not to change our recommendation, which is for clients not to touch either the ruble, the bond market or Russian equities,” Mudie said. “Russia has not sufficiently invested in diversifying the economic base beyond what remains an extremely heavy reliance on their substantial raw-material reserves, and that creates an imbalance in the economy.”
Mudie expects Russian gross domestic product will keep contracting in 2016 as the price of oil and other raw materials remains “weak.” The inflation rate jumped to 16.9 percent in March, the highest in 13 years, and the World Bank said this month the share of Russians living on $5 or less a day may rise to 14.2 percent in 2015 from 11.2 percent in 2014.
The government sold 30 billion rubles ($593 million) of domestic bonds on Wednesday, the biggest auction since October 2013, as the currency’s gains spurred bets inflation will slow and the central bank will keep cutting interest rates.
SocGen Private Banking prefers emerging markets that have been luring investors with steps to overhaul their economies, such as Indonesia, India, China or Mexico, said Mudie. The company, which sold out of Russian assets at the end of 2013 and the beginning of 2014, also has an overweight recommendation for the euro area’s high-yield corporate bonds and Japan’s equities.
“Russia appears to be turning more inwards rather than outwards and has not recognized the very positive impact that could be brought on its economy if they did make reforms,” according to Mudie. “The authorities still haven’t got on top of the economic situation.”