UBS's Russia Bull Says Fundamentals Warrant Buy Recommendation

  • Bank has had bullish call on the country since early July
  • Analysts at Barclays to Bank of America remain cautious

When UBS Group AG turned bullish on Russia in early July, it was somewhat of a false start as the ruble and stocks extended declines. Now the bank’s head of emerging-market strategy says the fundamentals that prompted him to upgrade the country are finally taking hold.

While analysts from Bank of America Corp. to Barclays Plc. remained cautious, Geoffrey Dennis at UBS raised his recommendation on Russia to buy from hold on July 9 as he thought the rout in oil, the nation’s main export, was near its bottom and the worst economic decline since 2009 began to show signs of easing. 

Between July and August, the equity market tumbled 19 percent while the currency slid the most among developing nations, and Dennis, who is head of global emerging-market strategy at UBS Securities, said the bank may have acted too soon.

Since then, the political and economic factors that made him bullish have started to fall into place. The ruble rallied the most among emerging markets in the last two months as crude prices stabilized and a truce between pro-Russian insurgents and government troops in neighboring Ukraine holds.

Near Bottom

“I’m not sure we were quite as right as we should have been as Russia had a weaker third quarter than we expected, but now we are somewhere near the bottom of the economy, oil prices are bottoming out, and Russia is still extremely cheap,” Dennis said by phone last week. “Other firms either don’t believe in an oil recovery or they believe that notwithstanding the oil or economic stabilization, other factors like sanctions will make it hard for the market to do well. We made our call based on fundamentals.”

Annual inflation decelerated in September for the first time in three months and speculation that the Federal Reserve will hold off raising U.S. interest rates until next year prompted some investors to take another look at riskier assets including Russian stocks, the cheapest among emerging nations.

Between fluctuating oil prices, geopolitical uncertainty and the extreme volatility in the ruble, making a timely and forward-looking call on Russia is among the tougher jobs in financial markets. In July 2014, just a month after lifting its call on the country’s stocks to buy, JPMorgan Chase & Co. reversed course to sell amid international sanctions imposed after President Vladimir Putin’s decision to annex the Crimean peninsula. UBS is the only one of seven major global banks that has had a bullish call on Russian assets since July.

Economic Adjustment

The ruble has tracked Brent crude’s 12 percent recovery from a six-year low in August, spurring wagers that policy makers will resume cutting interest rates to ease the recession. The economy is set to shrink for a second year in 2016, according to the central bank, extending its first recession since 2009 into the longest downturn in two decades.

The economy is adjusting to the reality of low oil prices, Bank of Russia Governor Elvira Nabiullina said in an interview earlier this month. Ending 20 consecutive quarters of net private capital outflows, Russia recorded inflow of $5.3 billion in the third quarter this year, according to the central bank.

Analysts from Bank of America, JPMorgan and Barclays have stayed neutral or bearish on Russia. It’s too early to call for a full recovery even as financial markets improve, according to Daniel Hewitt, an economist at Barclays in London, who forecasts Russia’s economy to contract 4 percent in 2015 and 0.7 percent next year.

Crude’s Slide

The ruble fell 0.4 percent to 62.62 against the dollar on Monday and the dollar-denominated RTS index slid 1 percent to 863.96. Brent was little changed at $48 per barrel after plunging 4.9 percent last week in the biggest five-day decline since August.

Dennis sees “firm support” for oil in the $45 to $50 range and the price will average $57 per barrel in 2016, he said.

“Russia is a call on the oil price,” Dennis said. “You also have the economy close to bottoming out, you have the market that is very cheap, and buying Russia seems like a no-brainer.”

Before it's here, it's on the Bloomberg Terminal.