Growth windows

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Despite the strengthening of geopolitical risks, at the beginning of the new five-day trading period, on April 19, the Moscow Exchange index reached a new all-time high of 3605 points. Why is this happening and what is the driver of the growth of Russian assets?

One of the positive factors is the outstripping improvement of the main economic indicators. Thanks to the effect of last year’s low base, recovery in energy prices, and an early start of the vaccination campaign, GDP will begin to recover and increase by 2.7–3.3% this year, and will continue to grow in 2022. These optimistic forecasts are reflected in the stock quotes.

In addition, the global growth of the stock market determines good dynamics. Recently, a number of indices have updated historical or multi-year highs. The day before, on Friday, the S&P 500 climbed to a record 4185 points, while the Japanese Nikkei225 was trading near the 30,000 mark, its highest level in several decades. In contrast to the American market, the growth driver of shares in Asia is becoming technology companies, which respond to high demand for chips and microelectronics. The MSCI Emerging Markets Composite Index of Emerging Markets (MSCIEF), after the minimum shown on March 25, moved to progressive growth. The global rise in stock indices along with increasing stimulus injections in the United States, as well as the expansion of the competitive advantages of Asian economies, provokes the growth of a wide range of assets, including developing countries.

For the Russian economy, it is important to note the increase in export potential. A stabilizing factor is the development of export-oriented non-oil and gas sectors: metallurgy, agriculture, fertilizer production, mining of precious stones and metals, and the chemical industry. In the structure of Russian exports, the process of replacing hydrocarbons continues. According to REC, the volume of non-resource non-energy exports (NEP) of Russia in 2020 increased by almost 4% in annual terms and amounted to $ 161.3 billion. At the same time, according to information from the FCS, the total volume of exports for the same period reached $ 324 billion. Consequently, NOE already accounts for almost 50% of GDP. The dependence of the economy and, in particular, the exchange rate of the ruble and the stock market on oil has significantly decreased due to the decrease in the share of oil and gas revenues in the structure of the federal budget to about a third of all revenues. However, the recovery in energy prices still acts as a support for quotations.

The price of oil has reached a maximum corresponding to the levels of the beginning of 2020. The long-term stabilization of prices at a high level is facilitated by progress in reducing inventories. This is happening not only in the United States, but almost all over the world. According to the International Energy Agency, less than 20% of the additional reserves that were formed during the pandemic remained in storage in February, which supports high energy prices.

The inflow of investments to Russia will grow due to the expected deficit-free budget with an increase in tax deductions from exporters. An improvement in the balance of payments will affect both the exchange rate of the Russian ruble and the stability of growth indicators. Net capital outflow in the first quarter amounted to $ 11.8 billion, which, however, was largely due to the sale of OFZs by non-residents. At the same time, in the private sector in 2021, an inflow of investments in Russian companies in the amount of $ 4 billion was recorded.

In the short term, I expect a volatile inflow of funds to funds investing, including in Russian assets. One of the long-term support factors will be the soft monetary policy of the major central banks. Much will also depend on the sanctions rhetoric (which may escalate), oil prices, the geopolitical situation on the border with Russia and the Central Bank’s forecast for the main macroeconomic indicators, which will be announced at the next meeting on April 23. At the same time, the Moscow Exchange index may continue to grow.

A long-term risk for emerging stock markets (including the Russian one) may be an increase in corporate and sovereign debt due to an increase in the credit burden. This can lead to an increase in yields on the debt market and, as a result, to an increase in money market rates. The latter will make it difficult to refinance debt obligations. But the regulator still has leverage to prevent such a scenario. These include, for example, the bad assets buyback program.

If there is no sharp exacerbation of the geopolitical situation, the Moscow Exchange index by the end of 2021 may reach 3800 points. At the same time, one should not expect linear growth. Local corrections are also likely, which may cause the indicator to weaken below 3300 points, which corresponds to the levels of the beginning of the year.

Author – Financial Analyst

The editorial position may not coincide with the opinion of the author