Russian Equity Rally Has BCS, Elbrus Predicting Market Reversal

Updated on
  • RTS Index may drop about 10% in next few weeks, BCS says
  • Elbrus's Khmelnitski cuts Russia exposure to 2% from 60%

Russian equities have posted some of the biggest returns in the world this year. Now two of the market’s most accurate forecasters are bracing for a pullback.

Anton Khmelnitski, whose Elbrus Fund outperformed the average of hedge funds investing in developing nations this year, recently reduced his exposure to the country to 2 percent from 60 percent, saying stocks have risen too far, too fast. Slava Smolyaninov, the chief strategist at BCS Financial Group, who in September correctly predicted a rally in the RTS Index, said he sees equities falling approximately 10 percent in about the next three weeks or so.

“We’ll be back investing in Russian equities, we are just waiting until oil is back to below $40 and the ruble is back to 75 per dollar,” Khmelnitski, whose Elbrus Fund returned 7 percent this year through April, said by phone last week. “It’s a market of extremes. The stocks fell too much in January, but the advance since then has been excessive.”

Russian equities typically move in tandem with oil, and price swings in the nation’s stocks, which are among the most volatile in the world, underscore just how vulnerable they are to fluctuations in crude prices. The RTS Index has soared 42 percent from its January low as Brent has advanced 61 percent during that time. U.S. crude stockpiles rose the most in 84 years in late April, and Citigroup Inc. said inventories will expand further into a record in May, fueling concern that the rally in the nation’s equities was excessive.

Smolyaninov of BCS, Russia’s largest brokerage, now says the RTS Index is poised to slump as much as 10 percent in the next few weeks. Since he made this forecast in late April, Brent crude has retreated 2.1 percent and the proportion of stocks in the index that send bearish signals has widened to 38 from about 8 percent, according to the gauge’s moving average convergence divergence index. The RTS benchmark trades at 6.8 times projected 12-month earnings, compared with a five-year average of 6.6 times, data compiled by Bloomberg show.

Khmelnitski, a hedge fund manager at EC Elbrus Capital Investments who in late January loaded up on Russian equities as the stocks plunged to a 2009 low, now sees the equity appreciation as excessive. His Elbrus Fund returned 11 percent last year and 7 percent this year through April, said Khmelnitski whose firm manages about $40 million. Hedge funds investing in emerging markets lost on average 5.2 percent in 2015 and added 2.7 percent this year, data compiled by industry tracker eVestment show.

Buying Opportunity

For Ian Hague, a founding partner at New York-based Firebird Management, Russian stocks present a buying opportunity. He has been purchasing Russian assets this year and and still thinks there’s money to be made in selective stocks even after a rally.

“Some of the oil-related uncertainty is gone, and the Russian market looks rather attractive,” Hague, who likes Sberbank PJSC and Cherkizovo Group PJSC, said by phone last week. “You still have sluggish economic growth and high reliance on oil, but some individual companies have a solid upside potential.”

Russian equities appreciated 16 percent in the three months through March, the biggest quarterly advance since 2012. The rally prompted strategists at JPMorgan Chase & Co. to join peers from Bank of America Corp. to Wells Fargo & Co. and UBS Group AG in advising clients to buy them.

Derrick Irwin, who helps manage $8 billion as a portfolio manager at Wells Capital Management, said he passed up on buying the country’s stocks.

“We saw a selloff earlier in the year, but we felt we were pretty comfortable with our position in Russia,” Irwin said by phone last week. “We are slightly underweight Russia, and while sanctions are in place, we are hesitant to make any moves in Russia.”