UBS Stands by Bullish Russia Call as Ruble Erases Gain for 2015

  • Investor sentiment sours as oil slump erases ruble's 2015 gain
  • Economists predict deeper slumps in GDP through early 2016

UBS Group AG thought the worst was behind Russia when it raised the country to buy from hold four weeks ago. Meanwhile, the ruble erased this year’s gain as oil sank, stocks continued to drop from their 2015 highs and analysts predicted a deeper economic slump than previously forecast.

Now Geoffrey Dennis, head of global emerging-market strategy at UBS Securities, acknowledges that the bank may have acted too fast. But he’s standing by the bullish call, saying the cheapest market in developing nations is a buying opportunity as the downturn approaches its bottom.

“Having been a little bit early, we would rather continue to push the overweight view on Russia,” Dennis said by phone on Tuesday. “Russia is in recession, but the economy is probably stabilizing now. Russia is still cheap, and if oil bottoms out at current levels, this could mean that the earnings momentum will start to turn.”

The Market Vectors Russia ETF, the biggest exchange-traded fund tracking the country’s stocks, has slumped 19 percent from this year’s peak in May. It had rallied as much as 41 percent after a plunge in 2014 that pushed the benchmark Micex Index’s valuation to the lowest in emerging markets. 

Sentiment soured as oil, the country’s biggest export, plunged into a bear market, halting a rebound in the ruble. Lower crude prices and sanctions linked to the Ukraine conflict are tipping the economy toward a 3.6 percent contraction this year, according to analysts surveyed by Bloomberg.

GDP Slump

Gross domestic product contracted 4.4 percent in the second quarter, following a 2.2 percent decline in the prior three months, the Economy Ministry said last month. A Bloomberg survey of 39 economists last month found that they raised their median estimate for the magnitude of the slump in each period through the first quarter of 2016. Government data this week showed manufacturing deteriorated for an eighth consecutive month.

The ruble, which had been the world’s best-performing currency earlier this year, erased its gain and has weakened more than 20 percent against the dollar since May. It fell 10 percent in July, extending declines as the central bank reduced its key interest rate to 11 percent. The currency’s rout prompted policy makers to suspend dollar purchases.

Consumer Prices

Citigroup Inc. on Tuesday said the ruble’s depreciation was excessive, according to a research note from analysts including Luis Costa. They raised their recommendation on the currency to the equivalent of hold from sell.

Inflation, which has slowed to 15.6 percent from a 13-year high of 16.9 percent in March, will continue to decelerate in the second half of this year, allowing policy makers to further reduce interest rates and shore up the economy, Dennis said. The pace of consumer price increases may ease to about 12 percent by year-end, according to a report by the International Monetary Fund on Monday. Russia may lower its key interest rate to 9 percent by the end of the year, Dennis said in a July report.

Crude Decline

The ruble weakened 0.5 percent to 63.38 per dollar on Wednesday. Brent crude, the oil grade traders use to price Russia’s main export blend, dropped 0.8 percent to $49.59 a barrel, about half its five-year average price. UBS forecasts that the ruble will be at 60 per dollar at the end of the year, Dennis said.

The Bloomberg Russia-US Equity Index gained 0.8 percent to 51.05 in New York, reducing the slump from its 2015 peak to 23 percent. The Micex, which has fallen 7.9 percent from its high this year, trades at 5.5 times the projected earnings of its members, the cheapest among developing-nation benchmarks.

“It looks like the economy is going to be a little bit less weak than thought before,” Dennis said. “The valuations came up a little bit, but Russia is still very cheap, and for some people the valuations can quite be attractive.”

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