Worst Russian Stock Drop Since 2008 Seen Continuing
Russian stocks are posting the biggest annual loss since 2008 as tumbling oil prices, a plunging ruble and international sanctions throttle the economy. Investors are signaling that next year isn’t looking any better.
Bearish bets on the biggest exchange-traded fund tracking Russian companies have surged to the highest levels since President Vladimir Putin annexed Crimea from Ukraine, triggering the worst standoff with the U.S. and its allies since the Cold War. The dollar-denominated RTS Index is headed for a 47 percent decline, the worst performance among 93 primary equity gauges.
Price swings in the RTS, which tracks the 50 most-liquid equities on the Moscow Exchange, are at the highest levels in six years as investors weigh the impact of the sell-off in crude and the sinking ruble on an economy already forecast to enter its first recession since 2009. Stocks on the ruble- denominated Micex Index sell for an average 4.6 times projected 12-month earnings, the cheapest in emerging markets.
«Investors see that Russian stocks are cheap, but the question is, between tumbling oil prices, swings in ruble, international sanctions and a never-ending conflict in Ukraine, are they cheap enough?» Kirill Yankovskiy, director of equity sales at Otkritie Capital Ltd. in London, said by phone on Dec. 17. «Russia’s equity market has never seen this range of negative factors hit all at the same time, and there is a lot of skepticism about what the stocks’ performance will be like in the year ahead.»
The ruble appreciated for the second time in three days on Dec. 19, trimming a fourth weekly drop. The central bank last week announced a range of measures designed to stabilize the financial system after a surprise increase in the benchmark interest rate to 17 percent from 10.5 percent failed to stem the biggest decline among the world’s currencies.
The RTS Index has fallen in 10 out of 12 months this year. Stock prices dropped and volatility jumped as investors reacted to developments in Ukraine, where the U.S. and the European Union say Russia is provoking a rebellion. Putin denies the claim and this month has cemented his position in the standoff, blaming the country’s former Cold War foes for the economic crisis.
Financing restrictions, export bans and other measures linked to the Ukraine conflict already had squeezed Russia’s $2 trillion economy. The outlook began worsening in October as crude tumbled into a bear market, pushing the ruble to its weakest levels since 1998. Brent crude traded at $61.38 a barrel on Dec. 19. It peaked at around $115 in June.
The economic crisis could drag on for two years and Russia should prepare for oil as low as $40 a barrel, Putin said at a press conference on Dec. 18. He also accused the U.S. and its allies of using the Ukraine conflict to contain Russia’s growth, comparing the current situation to the way they tried to isolate the country during the Berlin Wall era. In a Dec. 4 speech at the Kremlin, he likened his global opponents to Adolf Hitler.
«Putin uses strong rhetoric for the cameras, but he doesn’t have a plan, and we’re likely to see that inflation will reach high double digits, the economy will shrink and the ruble won’t bounce back,» Ian Hague, a founding partner at New York-based Firebird Management LLC, which oversees about $1.1 billion, including Russian stocks, said by phone from New York on Dec. 18. «The situation may change if sanctions are lifted, but Russia will have to withdraw from Ukraine, and I don’t see things moving in that direction.»
Analysts at JPMorgan Chase & Co. raised Russian stocks to the equivalent of hold from sell in a report dated Dec. 18, saying prices already reflect the drop in oil and the ruble. The bank has shifted its projection at least four times this year, making a sell call in early March as Putin began the annexation of Crimea, upgrading to buy in June, then cutting back to sell in late July.
The flip-flops highlight the volatility of the market as the conflict in neighboring Ukraine approaches its 10th month. The RTS Index’s 30-day historical volatility surged to 76 percent on Dec. 18, the highest level since December 2008.
«Equity valuations seem attractive and many investors are betting on a rebound, though a high degree of uncertainty is still there,» Andrey Shenk, an analyst at Alfa Capital in Moscow, said by phone on Dec. 18. «Russian stocks may have yet another tough year ahead if oil prices continue to tumble and the economic pressure from the West doesn’t ease.»
The central bank expects international sanctions to last through 2017, it said in November. Gross domestic product next year may shrink as much as 4.7 percent if oil averages $60 a barrel under a “stress scenario,” the monetary authority said on Dec. 15. Inflation at 9.1 percent in November was the fastest in more than three years.
The ruble has depreciated 45 percent to 58.55 per dollar this year, including a slide past 80 last week during the worst day in Russia’s nine-month financial crisis. The Micex’s average multiple of 5.1 this year compares with a 10-year average of 8.2, according to data compiled by Bloomberg. The Russian Market Volatility Index, which reflects price swings in equity futures, soared to a record high on Dec. 16.
The Bloomberg Russia-US Equity Index of the country’s most-traded stocks declined 4.1 percent last week, widening this year’s drop to 49 percent. The Market Vectors Russia ETF (RSX), the biggest exchange-traded fund tracking the country’s stocks, gained 2.5 percent to $16.19, narrowing its loss this year to 44 percent. Short interest as a percentage of shares outstanding in the fund surged to 16 percent last week, the highest level since mid March.
«There is a panic reaction in Russia,» Firebird Management’s Hague said. «Between soaring inflation, plunging oil prices and an economic standoff with the West, the situation looks really grim.»