Bank of America Corp is starting to see faint signs of an economic recovery in Russia.
The magnitude of a slowdown in capital investment is easing, while corporate profits have been increasing, a combination that the bank’s chief economist in Moscow Vladimir Osakovskiy said could mark a turning point.
The country’s recession might have bottomed when GDP shrank 4.6 percent in the second quarter and considering that company spending is likely to drive the recovery, that stabilization is likely to be more important for the broader economy than persistent weakness in consumer demand, he wrote in a report last week.
“Corporate profits in Russia are quite good year-to-date and we look at robust growth in corporate profits as the main potential driver of stabilization and recovery in the near future,” Osakovskiy said by phone from Moscow last week.
“We might see that the main macroeconomic indicators will start to improve on a year-over-year basis later this year, but we obviously have to wait until the increase in corporate profits spills over to the pickup in investment,” he said.
Corporate profits increased 43 percent in the first half of this year, compared with a year earlier, and grew 38 percent from January to July, even as oil plunged further into a bear market, data from the Federal Statistics Service show. That means companies might soon look to use capital to focus on expansion, Osakovskiy said.
Investment is the only way to stimulate growth in Russia’s economy, Russian Deputy Finance Minister Maxim Oreshkin said this month.
The Bank of America remains neutral on Russian markets, while the price of oil, the country’s biggest export, remains volatile, according to Osakovskiy. The country’s stocks remains a risky buy in the near future, but their low valuations compared with equities in other emerging markets make Russia an attractive investment destination in the medium term, he said.
Russia’s Micex index trades at 5.2 times projected earnings, the cheapest among emerging-market peers, according to data compiled by Bloomberg.
The dollar-denominated RTS Index, which has historically been highly correlated with the price of oil, can rally to 930 in the next 12 months, an 18 percent increase from Friday’s closing level, BCS Financial Group said.
Investors, who had been returning to Russia earlier this year following the world’s biggest stock slump last year, have been backpedaling since May as the ruble resumed its slump and swelling global inventories pushed Brent crude to less than half its five-year average price. Franklin Templeton, which oversees almost US$900 billion of assets, liquidated its 20-year-old regional fund.
French lender BNP Paribas SA exited its local fund-management venture six years after its acquisition.
Alfa Capital analyst Andrey Shenk said a turnaround in crude prices and signs that the worst of the economic slump is over could be all it takes to lure investors back again.
“Russia doesn’t look like a rosy investment destination amid a recession and plunging oil, but the market is cheap and valuations can be attractive,” Shenk said by phone.
“Once we see oil going back up and the economy improving, Russia could be a good place for investors to consider,” he said.
Barclays Plc economist Daniel Hewitt, who forecasts that Russia’s economy is likely to contract 4 percent this year and 0.7 percent next year, do not see that happening any time soon.
“The economy declined about 5 percent in the second quarter and probably won’t get much worse, but the main thing is that it’s not going to get better,” Hewitt said by phone.
“It looks like bad times are here to stay,” he said.
The Bloomberg Russia-US Equity Index slumped 4.2 percent in New York last week. The Market Vectors Russia ETF retreated 2.7 percent to US$15.64. The ruble strengthened 1.7 percent against the dollar, posting the only weekly gain among 24 emerging-market currencies tracked by Bloomberg.
Brent crude, which has slumped from a peak of US$115 a barrel in June last year, sold for US$48.60 at the close of trading on Friday.
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