Russian Stocks Strengthen Link With Crude Prices Amid Volatility

Updated on
  • RTS Index correlation with stocks has climbed to two-year high
  • Stocks rose the most since January as Brent added 10%

Forget about price-to-earnings ratio, the latest macroeconomic data or fundamentals. When it comes to Russian stocks, among the cheapest in the world, it still all boils down to the price of oil.

The dollar-denominated RTS Index of Russian equities posted the biggest advance since January on Thursday, but don’t let that fool you: They are simply following moves in Brent crude, which soared the most since December 2008.

The 120-day correlation between the RTS Index and oil has climbed to 0.53, the highest level in more than two years, up from 0.32 just two weeks ago. A reading of 1 implies two securities are trading in lockstep. For Russia’s energy-heavy market, this means that the nation’s largest export dictates whether its equities will rise or fall.

“Brent prices are something the market lives and dies by,” Anastasia Levashova, a portfolio manager at Blackfriars Asset Management Ltd., said from London on Thursday. “For a market that is so dependent on oil, there is a strong correlation: once oil is up, the ruble is rallying and the stock market gains, once oil tumbles, the market is having a bad day.”

The RTS gauge, which includes companies such as Lukoil PJSC and OAO Rosneft, rose 6.7 percent to a one-week high on Thursday. A Bloomberg index of the most-traded Russian stocks in the U.S. also gained the most in more than seven months, jumping 5.9 percent to 49.66.

The ruble advanced 4.4 percent to 66.0090 against the dollar, the most among emerging-market currencies. Brent crude, which traders use to price the country’s main export, soared 10 percent to $47.56 on Thursday, and traded at $47.65 at 10:30 a.m. Singapore time. The Micex Index rose 2.1 percent in Moscow, the most since April, to 1,695.22.

When Brent dropped 6.1 percent on Monday, the ruble posted the second-biggest drop in developing currencies and the RTS benchmark slipped 4.9 percent.

What this means is that equities are rebounding even when the economic outlook keeps getting bleaker.

Gross domestic product in the world’s largest energy exporter will fall 3.3 percent in 2015, down from an earlier projection of a 2.8 percent decline, Economy Minister Alexei Ulyukayev said Tuesday in Kuala Lumpur, according to the Interfax news service.

Growth will contract “slightly” in 2016 if oil stays at $40 per barrel, he said in Moscow on Thursday. The drop in energy prices and sanctions linked to the Ukraine conflict curbed international financing, dragging the economy into its first recession in six years.