JPMorgan Joins Russia Bulls After Rally as Risks Fade

Russian stocks have been so volatile amid the turmoil in Ukraine that it took a bull market to convince JPMorgan Chase & Co. that it’s time to buy.

The bank’s upgrade from sell yesterday follows a 21 percent advance in the benchmark Micex Index from its bear-market low in March. Stocks are rallying as President Vladimir Putin signals that he’s willing to work with Ukraine’s new leader, reducing concern that Russia will face more sanctions. Bank of America Corp., which has had a buy rating on Russian stocks since September, reiterated its bullish view on June 17. Deutsche Bank AG strategist John-Paul Smith predicted a rebound six weeks ago.

“The two key catalysts are the fading of the Ukraine crisis and the shift in positioning,” JPMorgan analysts including David Aserkoff and Christian Kern wrote in a report on June 18. “Global emerging-market funds are underweight for the first time since 2009. The emerging-market value trade seems to be working, which should benefit Russia.”

The analysts raised their rating on Russian shares to overweight after cutting it to underweight on March 6 as Putin began the annexation of Crimea. The Micex entered a bull market on June 6. The gauge’s 30-day historical volatility, a measure of price swings, reached a five-year high of 46.2 percent on April 11.

Ukraine Conflict

Ukraine President Petro Poroshenko yesterday reiterated a plan to end fighting in the country’s southeast region after talks with Putin. The Micex gained for the second day, rising 0.7 percent to 1,504.23 by 8:20 a.m. in New York. The Bloomberg Russia-US Equity Index of the most-traded Russian companies in the U.S. jumped 1.9 percent yesterday.

“Russia still provides better value than other emerging markets,” David Hauner, a strategist at Bank of America, said in a telephone interview from London yesterday. “The risk reward is not as high as it was a couple of months ago, but our view on global equities is positive and Russia will outperform the market.”

Smith, the Deutsche Bank strategist who predicted Russia’s 1998 stock-market crash and had been bearish on the country for more than three years, said in May that investors were overreacting to the conflict in Ukraine.

Russia’s second-biggest oil producer OAO Lukoil, eastern Europe’s biggest lender OAO Sberbank and Russia’s second-biggest mobile phone company OAO Megafon are among JPMorgan’s top emerging-market stock picks, according to the note.

Aserkoff in London and Kantarovich in Moscow weren’t available for comment on the timing of their overweight recommendation when contacted by phone and e-mail outside regular business hours yesterday.

‘Pretty Negative’

Morgan Stanley raised Russian stocks to overweight on May 8 before Ukraine elected Poroshenko. Citigroup Inc. has an overweight recommendation on Russia in its global emerging markets portfolio, according to a report this month.

Capital Economics Ltd., in an e-mailed research note yesterday, said it is “relatively downbeat on the outlook for Russian equities” and expects stocks and the ruble to fall.

“Our view on the Russian market is pretty negative,” Liza Ermolenko, a London-based emerging-market economist at Capital Economics, said by phone yesterday. “While the economy is slowing, no one really knows what is next in the Ukraine crisis and whether further sanctions against Russia will be approved. The Russian market is very sensitive to the Ukraine crises, and there is no quick solution.”

International Sanctions

Ukraine will call a unilateral cease-fire to help end three months of fighting with pro-Russian separatists, Poroshenko said in Kiev yesterday. Insurgents will be given a limited window to lay down their arms, with those who haven’t committed any serious crimes to be offered an amnesty and safe passage out of the country, he said.

The U.S. and European Union have imposed sanctions including travel bans and asset freezes on Putin allies in Russia and Ukraine to punish the country for its standoff with Ukraine. Russia’s gross domestic product grew 0.9 percent in the first quarter from the same period in 2013, the slowest pace in a year, the Federal State Statistics Service said on May 15.

While the $2 trillion economy was stalling before the sanctions, the U.S. and EU have warned the nation faces further penalties if fails to de-escalate the conflict. Ukraine and Russia are also in conflict over gas, with Russia cutting off supplies on June 16 because of unpaid bills. The International Monetary Fund said April 30 that Russia is already in recession.

The Micex trades at 5.4 times estimated 12-month earnings, compared with a ratio of 15.5 for India’s S&P BSE Sensex Index, 10.7 for Brazil’s Ibovespa and 7.6 for the Shanghai Composite.

The RTS Volatility Index, which measures expected swings in the index futures, was little changed today, while RTS stock-index futures increased 1.6 percent to 132,920 yesterday. The Market Vectors Russia ETF, the biggest U.S.-traded exchange-traded fund that holds Russian shares, rose 2.6 percent to $26.88.

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