Despite its scientific pretensions, economics remains more of an art than a science.
Robert Kuttner.
Macroeconomic & Market Trends in Charts.
9 months of the year 2019

Stride Consulting, Dec. 08, 2019

 

The Russian economy has recovered from the 2015 slump of 2.9%, however continues at a slower pace than the global economy, ranging between 1.5%-2.0%. But...

 

 

 

 

 

Stock market: at this junction all are equally happy 

 

  • The market faces a unique situation when all of the central banks are easing their monetary policy and cutting the key rates. This results in overall higher indexes and places Russia’s stock market among the growth leaders.

 

  • Investment funds have stocked up with hedge assets and are ready to further invest in equities. However, the market is rather sensitive to geopolitical shocks (trade war with China, Brexit, etc.). 

 

  • U.S. economy is in good shape, the unemployment rate is at record lows. 3Q economic growth stands at 1.9%, the S&P 500 broad market index has inched up 22.6%.

 

  • European indexes saw a slower growth due to the slow momentum, while optimistic corporate financial statements are pushing the stock market to new peaks.

 

 

Wall Street an obvious leader, Asian tigers lying in wait for the prey

 

  • Asian market capitalization (China, Hong Kong, India, South Korea, Singapore, Thailand) is $14.8tn, which already for 48.7% of the U.S. market capitalization.

 

  • According to IMF data, as of October 2019 the economic growth rate in the Asia-Pacific region averaged 4.8%.

 

  • The slowdown in global economic growth may induce capital outflows from Asia, however this is more a matter of geopolitical interests.

 

  • Russia’s stock market is undervalued (P/E ranging from 5 to 7) and accounts for circa 35% of GDP. Although ranked only 16th by market capitalization, Russia has a multiple growth potential in the mid-run.

 

 

Interest Rate: there is still room to cut

 

  • Over the past 12 months, 10Y treasuries yields have declined by 0.829% to 1.857%.

 

  • The Fed reduced the rates thrice this year, and at the October 2019 meeting the Interest Rate was slashed to a range of 1.50% to 1.75%. The rate cuts are probably on pause from here and could be prompted by lowered inflation.

 

  • The Bank of Russia’s Interest Rate was brought down to 6.5% YTD and the spread between Russian and U.S. treasury bonds shrank by 0.9% to 4.5%.

 

  • The Fed’s inflation target is 2%, Russia’s – 4%. However, while the U.S. Fed Funds Rate (1.75%) has triggered investment activity, the Bank of Russia’s Interest Rate (6.5%) has not yet become a benchmark for the stock market, however it can lead to a significant fall in lending rates.

 

 

Ruble is 2019’s best-performing developing-market currency

 

  • Since the start of 2019, the Russian ruble has appreciated against the U.S. dollar by 8.7%, while the Brazilian real, the Indian rupee and the Chinese yuan have weakened by 3%, 2.4% and 1.7% respectively.

 

  • The ruble’s strengthening is attributable to both favorable external factors (oil & metal prices) and internal factors (economic environment):

 

    • As of 9M 2019, budget surplus stands at 3.8% alongside the strict fiscal discipline
    • $133.3bn trade balance surplus and $57.2bn current account surplus as of 9M 2019
    • Global foreign exchange reserves recovered to $530bn and Russia’s National Welfare Fund currently holds assets worth 8 trillion rubles.

 

 

The ruble remains an oil-backed currency

 

  • Ruble and oil prices are highly correlated. However, ruble volatility has dwindled considerably over the past two years, with the efforts of the Russian Government and the Bank of Russia.

 

  • Geopolitical struggle over energy resources is expected to be intense. In 2019, oil prices remained within a comfortable range for the fiscal budget.