Pavilion Forecasts Micex Drop as Russian Stocks Resume Oil Link

  • Micex index has risen 22% this year as Brent crude slid 16%
  • Russia relies on oil and gas for about half its budget revenue

The rally in Russian stocks traded in Moscow probably won’t last much longer as the benchmark index re-establishes its correlation with oil, which has plunged to less than half its five-year average price, according to Pavilion Global Markets Ltd.

The ruble-denominated Micex Index has gained 22 percent this year, compared with a 13 percent drop in the MSCI Emerging Markets Index. In dollar terms, the Russian gauge is up 3.5 percent in 2015. The equity rally comes as Brent crude, the benchmark used to price the country’s exports, sells for less than $50 a barrel, about 30 percent below this year’s high. Slumping oil prices and sanctions linked to the Ukraine conflict have pushed the world’s largest energy exporter into its first recession since 2009.

While the depreciation of the ruble, which has weakened 19 percent in the past three months, might explain some of the resilience in locally traded Russian equities, the divergence between oil and stock prices appears extreme to Francois Boutin-Dufresne, a strategist at Pavilion Global Markets. He predicts a sharp decline in the Micex in the next six to 12 months.

“The positive effect of the ruble depreciation aside, the shock of lower oil prices is going to filter through from the oil sector to the broader economy, and at some point this has to materialize in the ruble stock market,” Boutin-Dufresne said by phone from Montreal, Canada, last week. “For local investors this might not be the end of the world, but for foreigners who look at the dollar price -- terrible investment.”

Crude is Russia’s biggest export and the country gets about half its government budget revenue from energy sales. Oil and gas companies account for about half the Micex’s weighting. Historically, trading patterns where stock prices move in tandem with oil prices have been common.

Boutin-Dufresne didn’t provide a specific estimate for his projected decline in the Micex index.

The 60-day correlation between the Micex Index and Brent crude has climbed to 0.54, near the highest level in three years and up from 0.1 just a month ago, according to data compiled by Bloomberg. A reading of 1 implies two securities are trading in lockstep.

The Micex index plunged 13 percent in less than a month last December as the ruble tumbled the most in emerging markets following a rout in oil and as policy makers increased the key interest rate to 17 percent to prop up the currency. The late-year rout in 2014 “was so huge and the market was so beat up that it almost had to rally this year to regain its position,” Vladimir Vedeneev, chief investment officer at Raiffeisen Capital Asset Management in Moscow, said by phone last week.

While energy companies dominate the Micex, lender Sberbank PJSC has contributed the most to the gauge’s increase in 2015 with a 38 percent rally, data compiled by Bloomberg show. Metal producer Norilsk Nickel PJSC and retailer Magnit PJSC also were among the companies having the biggest impact on the rally.

Growth Slump

“What this might mean to investors is that the Russian market, though highly dependent on the price of Brent, is not just about oil,” Aleksei Belkin, the chief investment officer at Kapital Asset Management LLC, said by phone last week.

Russia’s gross domestic product, which expanded at an average pace of 5.6 percent during the first decade of the 2000s, contracted 4.6 percent in the second quarter, following a 2.2 percent decline in the prior three months. GDP will probably slump 3.7 percent for all of 2015, according to the median estimate of 41 economists surveyed by Bloomberg.

For Howard Ward, chief investment officer of growth equities at Mario Gabelli’s Gamco Investors Inc., the 22 percent advance in the Micex this year, which compares with a 4.9 percent decline in the Standard & Poor’s 500 Index in the span, is not a reason to change a bearish view on Russia.

“I have never in the past 10 years invested in Russia, because I don’t care about the Micex index that is up so much this year, I still don’t want to be involved,” Ward, who oversees $45.4 billion in Rye, New York, said by phone last week. “I care about the fundamentals. I know the fundamentals of the Russian market, and I’m not a fan.”

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