In the trade conflict, signs point to an easing of tension, at least for the time being. At the same time, expectations of permanently low-key interest rates at the major central banks remain unchanged. This combination supported the emerging markets and their currencies in recent months. We expect global economic stabilization to continue in 2020. In this environment, emerging market investments are likely to remain in demand. We have a clear preference for the Asian emerging markets over Eastern Europe/Russia.

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Since the Crimean crisis and the associated sanctions, Russia has been out of the focus of market participants as an investment region. Following annexation of the Ukrainian Crimean peninsula in 2014, Western states imposed sanctions on Russia. These include entry bans, account freezes and restricted access to high technology for the important oil and gas industry. Russia reacted with counter sanctions and extended them for 2020. Despite lack of interest from foreign investors, the Russian stock market index RTS has performed quite well. Thanks to oil price recovery and easing steps by the Russian central bank, the RTS more than doubled in the last five years. In 2019 alone, it was up by a good 40%. We do not expect this outperformance of the Russian stock market to continue in 2020, although the valuation remains very favourable with a P/E ratio of 6.5.

 

Instead of the expected easing of the political conflict, at the turn of the year, further US sanctions were imposed on Russia in connection with the Nord Stream 2 Baltic Sea pipeline, which will probably not be completed before the end of 2020. Energy revenues that the state and the major gas/oil companies such as Gazprom had already anticipated in the coming months are very significant not only for the economy's external and internal balance sheets, but also for its stock market, where around 50% of market capitalization is accounted for by the energy/raw materials sector. In addition to lower energy exports, we believe that the oil price also has little upside potential in the current global economic environment. Moreover, stock market stimulation from further interest rate cuts, which have already been largely anticipated, is not to be expected, nor are surprisingly high dividend payout ratios or share buybacks, which were record high in 2019 and are unlikely to be repeated. 

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Whether Russia's economy will be less sluggish in 2020 than last year and the implementation of the so-called "national projects" will be more successful than before, is questionable. According to the report of the Russian Court of Audit, only 6 out of 11 targets set within the framework of the "National Projects" have been tackled so far. This was partly due to bureaucratic hurdles and partly to the lack of attractiveness of the programs. For example, the credit support program for small and medium-sized enterprises was hardly drawn at all. Nevertheless, it is encouraging that Russian consumers are slowly recovering from the shock of the VAT increase and are gradually consuming more again.

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Dr. oec. Susanne Toren

Chief Economist

Assetco Management

susanne@assetco.ch