Russian equities have bounced nicely since the U.S. Senate passed the new sanctions bill back in June. Economic tailwinds and likely rate cuts should support a further rally in the second half of 2017.
From my latest article at Seeking Alpha:
But that marked the bottom in the Russian MICEX Index, not the beginning of the end. Since then the Russian stock market has risen 200 points (11.2%) and has resumed its uptrend from a monthly perspective.
This has occurred even though Gazprom (OTCPK:OGZPY), one of its biggest contributors (15% of weighting) has gotten killed. This should underscore for you just how strong the situation is in Russian equities.
Trade volumes for July were up across the board, year-over-year.
The quarterly chart is still bearish. It would take a September close above the April high of 2058.11 to negate the breakdown on the quarterly chart that occurred in Q1. This is well within the realm of possibility if the MICEX closes above 2000 in August.
The article goes on to discuss the possibility of further rate cuts by the Bank of Russia (BoR). Between overnight lending rates now firmly below 9% and trending towards 8%, and Russian government auctions regularly well-bid at 7.8% to 8.1% across the yield curve, the BoR has more than enough room to cut here.
As conservative (or subversive, depending on your point of view) as BoR President Elivra Nabullina is, I can’t believe she’ll keep rates at 9% seeing as the economy has reached her inflation target of 4%.
That’s a real rate of 5+% in a world where 50 basis points is considered good yield. The Russians, smartly, are pursuing almost Austrian monetary policy. Allowing risk to be priced on the market rather that at the Central Bank’s whim for political reasons, such as upcoming elections.
Now, that isn’t to say that there isn’t any political angle to rate cuts here with Vladimir Putin seeking re-election next fall, but keeping a lid on hot money flows is necessary if Russia does not want to be subject to a sudden yanking of it to cause a disruption in the Ruble.
I expect Nabullina will cut 25 basis points here to 8.75% but she should go to 8.50%. This will keep the savings rate high while ensuring that the structure of production stays focused on improving the immediate needs of Russians, while the government reinvests oil and gas tariffs into longer-term projects at subsidized rates at around 4%.
This isn’t Austrian economic in any meaningful sense of that term, but it is far more responsible than the reckless monetary policy of the West. The height of which will be on display today at the annual Central Banker Self-Congratulation Party in Jackson Hole, Wyoming.
Remember my saying about global capital flows. You only have to treat capital slightly better than the next guy to see it flow to you. If Nabullina cuts to 8.5% this month and the overnight lending market responds favorably, it will begin the normalization of the Russian yield curve so desperately needed for the expansion to take off.
And the Russian economy will continue to operate in ways that signal capital invested there will earn a real return over the long run.