Russia becomes emerging-market highlight amid global energy chaos

Karl Lester M. Yap, Netty Ismail and Srinivasan Sivabalan October 12, 2021

(Bloomberg) --Surging energy prices are kindling bullish bets on developing-nation exporters, with Russia emerging as traders’ favorite investment destination.

Russia’s ruble has gained more than any other emerging-market currency this month, bolstered by the prospect of higher oil revenues, while the nation’s stocks outperformed as a broad gauge of developing equities sank. OPEC’s monthly report will be closely watched this week as investors seek further clues on the outlook for the oil industry.

It marks an abrupt change of pace for emerging-markets investors who’ve spent the last few weeks alternately worrying over the threat of cascading debt delinquencies from China’s Evergrande crisis and the looming prospect of tighter policy from the Federal Reserve. That’s soured demand for the stocks, bonds and currencies of emerging economies across the board -- until now.

Investors have switched to weighing the assets of energy exporters from Russia to Colombia -- whose peso is the No. 2 performer this month -- to determine which offer the best bet.

“Energy prices will remain elevated and companies in commodity-exporting nations will be beneficiaries of the global tightness in the supply of power-related commodities,” said Ali Akay, the London-based chief investment officer of hedge fund Carrhae Capital. “This theme should continue to re-rate energy and materials exporters.”

Russian Doll

Ructions in the energy market have thrown a spotlight on Russia’s status as an oil and gas superpower and its healthy finances. The world’s biggest energy exporter has over $600 billion in reserves, an enviably low debt burden, and is pushing hard with rate hikes to tame inflation. The local-currency value of Russia’s oil exports was around a record 6,000 rubles per barrel of Brent on Monday.

A look at earnings upgrades for Russia compared with other emerging markets illustrates the divergence. Twelve-month earnings projections for Moscow-listed stocks have surged 15% since the second half of the year. In comparison, profit forecasts for companies in Saudi Arabia have increased 6.7%, are little changed in Asia and have fallen in Latin America. Energy companies in emerging markets are also about a third cheaper compared with the broader index despite recent gains, suggesting the rally has room to power on.

Money managers like London-based hedge fund Carrhae Capital have responded by partly shifting from Chinese technology shares to Russian energy companies in the third quarter. Wells Fargo Asset Management also moved its investments from China to Russia. JPMorgan Chase & Co. added to its position on the Russian Depositary Index as it remains bullish on commodities and oil-related bets into year-end, strategists led by London-based Davide Silvestrini wrote in a report.

“Higher oil prices will drive higher earnings and dividends in the energy stocks which account for 59% of the index, and drive a stronger ruble which in turn drives the domestic stocks, another 25% of the index,” they wrote. “As such, it is fundamentally perfectly suited as an equity vehicle for our bullish call on commodities, and oil in particular.”

In Asia, Indonesia is benefiting from the surge in commodity prices with foreign stock inflows completing their biggest weekly tally since May 2020 last week. The rupiah is the best-performing currency in Asia this month.

These are the events and data to look out for this week:

  • Russian Energy Week from Wednesday through Friday will showcase the prospects for the country’s fuel and energy industry
  • Russia’s trade data due Tuesday and inflation report the following day will also watched
  • Czech assets will be in focus after Prime Minister Andrej Babis suffered a surprise, razor-thin defeat in general elections, setting the stage for protracted political wrangling over forming a new government that may eventually force the scandal-plagued billionaire from power. The koruna was one of the biggest losers in emerging markets last week
  • In China, a slew of data will provide clues on the health of the economy, which has been hit by a worsening energy crunch
  • The expansion in China’s aggregate social financing likely picked up in September from August as the authorities boosted credit support for the economy, according to Bloomberg Economics
  • Export and import growth likely slowed in September from August
  • Data due Thursday will probably show that consumer price inflation remained subdued in September, while the producer price index likely jumped on higher commodity prices
  • The Bank of Korea is set to keep its benchmark rate on hold at 0.75% on Tuesday after lifting it from a record low in August
  • On Wednesday, Chile is expected to hike its benchmark lending rate by 75 basis points Wednesday to 2.25% after consumer prices rose more than expected in September in one of the world’s fastest growing economies
  • Peru will release economic activity figures for August that will give investors a sense of the pace of the nation’s economic recovery as they weigh the chaotic start to the government of President Pedro Castillo. The country will also report September unemployment figures
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