Investors need to look for an ‘event’ trigger to buy Russia, not a ‘valuation’ trigger. Attention will remain on: i) further CB action; ii) the risk (still) of capital controls; and iii) the risk of corporate defaults; iv) any political fallout in Russia from this crisis.
However, EM equities as a whole should rally before Russia does for two reasons. First, the contagion from Russian events on other EMs has, so far, been limited to some manageable currency weakness. No other EM central bank has had to raise rates in response to FX moves that was not going to tighten anyway, nor do we expect much in the way of rate hikes in other EMs in response to Russian events. Secondly, we see few broad negative impacts on the overall EM growth story for 2015, as one of the major triggers for the crisis in Russia – collapsing oil prices – is a boon for much of the world economy, including for most emerging markets, notably in Asia.
The report notes three earlier periods as parallels to current events: i) Mexico (1994): although the peso devaluation (December) was a more cathartic break of a fixed peg, the Ruble has now fallen more this year (-52%) than the peso did in 1994 (-37%), although the MXN eventually fell by 56% by March 2015; Mexican GDP fell by 5.8% in 1995; ii) Russia (1998): this was a much worse situation ($14 + $13) than today, given that Russia had only $14bn of reserves in August 1998 (v. $361bn at end-November) and oil prices were at $13/barrel at that time; iii) Brazil (2002-3): this showed how a currency crisis should be managed. Rates were pushed up gradually to 26.5% which, combined with CB intervention, placed a floor under the Real at close to R$4.00.
1.Since the OPEC meeting on US Thanksgiving Day, EM is down 10%, Brent prices are down 22% ($77 to $59/60), MSCI Russia is down 30% and the Ruble by over 40%.
2. Russia is now just 3.2% of GEMs – the ninth biggest EM (overtaken by Mexico and Malaysia this year) – down from 6.1% at end-2013 and a peak of 11% in June 2008.
3. This was the sixth interest rate hike in Russia this year (5.5% to 17%).
4. The intra-day range for the Ruble today was over 35% (RUB58.25 to RUB79.15), but the currency ended the day down just over 5% (only). 5. MSCI GEMs hit a low for the year today, down 9% year-to-date; the asset class was up 10% on the year in early-September. Time to Buy?