Wednesday, January 19

Global energy chaos makes Russia top choice for emerging markets

Rising energy prices are igniting bullish bets on developing country exporters, with Russia emerging as the favorite investment destination for traders.

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 stocks plunged. . OPEC’s monthly report will be closely watched this week as investors seek more clues about the outlook for the oil industry.

It marks an abrupt change of pace for emerging market investors who have spent the past few weeks alternately preoccupied with the threat of delinquency cascading from China’s Evergrande crisis and the looming prospect of tighter policy from the Federal Reserve. That has soured demand for stocks, bonds and currencies from emerging economies across the board, so far.

Investors have chosen to weigh the assets of Russia’s energy exporters to Colombia, whose weight ranks second this month, to determine which offers the best bet.

“Energy prices will remain high and companies in commodity exporting countries will benefit from global shortages in the supply of energy-related commodities,” said Ali Akay, chief investment officer at hedge fund Carrhae Capital. , based in London. “This issue should continue to requalify exporters of energy and materials.”

Russian doll

Rumors in the energy market have highlighted Russia’s status as an oil and gas superpower and its healthy finances. The world’s largest energy exporter has more than $ 600 billion in reserves, an enviable low debt load, and is pushing rate hikes to control inflation.

A look at Russia’s earnings improvements compared to other emerging markets illustrates the divergence. Twelve-month earnings projections for Moscow-listed stocks have risen 14% since the second half of the year. By comparison, earnings forecasts for companies in Saudi Arabia have risen 6.7%, have changed little in Asia and have fallen in Latin America. Energy companies in emerging markets are also around a third cheaper compared to the broader index despite recent gains, suggesting that the rally has room to continue.

Money managers like London-based hedge fund Carrhae Capital have responded by partially shifting from Chinese tech stocks 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 Depositories Index as it remains bullish on commodities and oil-related bets through the end of the year, London-based strategists led by Davide Silvestrini wrote, in a report.

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

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

These are the events and data to take into account this week:

  • Russia’s Energy Week from Wednesday to Friday will show the prospects for the country’s fuel and energy industry.
    • Russia’s trade data to be delivered on Tuesday and the inflation report the next day will also be seen.
  • Czech assets will be in the limelight after Prime Minister Andrej Babis suffered a surprise and flagrant defeat in the general election, setting the stage for a protracted political dispute over the formation of a new government that may eventually force the billionaire. plagued with scandals to leave power. The crown was one of the biggest losers in emerging markets last week.
  • In China, a wealth of data will provide clues to the health of the economy, which has been hit by a worsening energy crisis.
    • China’s aggregate social finance expansion likely rebounded in September versus August as authorities boosted credit support to the economy, according to Bloomberg Economics.
    • Export and import growth probably decelerated in September compared to August.
    • Data to be released on Thursday will likely show that consumer price inflation remained subdued in September, while the producer price index likely jumped on higher commodity prices.
  • The Bank of Korea will keep its benchmark rate on hold at 0.75% on Tuesday after raising it from a record low in August.
  • On Wednesday, Chile is expected to raise its benchmark interest rate by 75 basis points on 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 an idea of ​​the pace of the country’s economic recovery as they weigh the chaotic start of the government of President Pedro Castillo. The country will also report unemployment figures for September.

© 2021 Bloomberg

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