While 2011 was a seriously down year for the emerging markets across the board — Russia being down less than other BRIC countries, the first quarter 2012 saw a dramatic rebound. Among the oil & gas companies Lukoil and Gazpromneft (the old Sibneft) were up 24%, Rosneft was up 19%, Tatneft 39%, TNK-BP 26% and Gazprom 27%. The price of oil remains strong, domestic demand is solid and, overall, commodity exports continue to generate positive earnings growth…On the other hand, stock market prices are slumping in this, the second quarter due to continuing concerns about the EU economies and growth in China.
The steel sector of the Russian economy has weakened as the inventoried cost-of-goods grew while export prices softened, but Mechel was up 26% for the first quarter; Severstal was up 18% and NLMK 19%. Norilsk was up 23%. Rounding out the commodity exporting sectors, Uralkali, potash fertilizer exporter, was up 11%. Again, tough, the second quarter has showed renewed weakness thus far.
In the retail sector, Magnit, Dixy and X5 showed dramatic stock price recoveries from 2011, up 48%, 45% and 28%, respectively, and these stock price gains are sticking better than for the commodity exporters. While many stocks remain in the middle of their 52 week price ranges, Gazpromneft, Lukoil, Rosneft and Tatneft, and TNK-BP, among the Russian majors, and Dixy and Magnit, in the retail sector, were at or near their 52 Week Highs. In sum, then, the Russia stock market has continued to exhibit volatility and, overall, has seen some price recovery from 2011 which I expect to continue given its underperformance and low valuations, depending of course on the world economic outlook which proved so damaging last year.
Continuing with the Oil & Gas sector, there is currently discussion about changing the recently enacted “60/66” oil tax regime to “55/60” whereby export duties on crude would be lowered to 55% and the rate on refined product would be 60%. It is doubtful this will in fact happen given the Government need for revenue to fulfill social program promises made in the political campaign. In the gas sector, Gazprom currently is under pressure to pay more tax. While the fiscal deficit is modest, the Government of Russia has maintained a consistent policy of keeping it that way; hence, the need for more revenue. Personally, I am not surprised or concerned about the pressure on Gazprom, the market bell weather: the Government of Russia has a longstanding commitment to the EU to bring domestic Russian gas prices up closer to world market levels, and it was always clear it would not allow the companies to capture all that upside.
Production/ output in the oil sector remains the world’s highest and export demand robust despite slowing economies in Europe and America…..Gazprom now offers a dividend yield higher that Exxon, Chevron, BP, Petrobraz or Petro China.
At a Brent 2012 oil forecast of $117/bbl, I do not expect an increase in oil earnings from the record highs in 2011 which benefited from the strong price, reduced taxes and a weak ruble. Still, valuations are attractive. Top picks would be Lukoil, TNK-BP ( which suffered some recent adverse PR concerning allegedly worn-out pipelines) and Gazpromneft.
Russian Economy. On the macro front, the Russian economic growth forecast is now 4%. Recently announced Government programs imply a relatively favorable climate for domestic investment as the Government seems focused on increasing its take from oil and gas exports in order to keep its fiscal deficit continuingly modest. Financial reserves are 3rd in the World and, given Vladimir Putin’s election as President, political stability remains although the “Putin Brand” is clearly tired and public protest against one-man, one-party rule is increasing. My own sense is that, long term, this unrest is a positive although investors need to account, short term, for any heightened “Russia risk”. As Putin himself opined on page 175 of my book OUT OF THE RED (John Wiley & Sons. 2008): “the growing middle class is the standard bearer of democracy” and that is exactly what is happening in Russia today.
Future prospects should be positively impacted by the following: World Trade Organization membership stimulating Foreign Direct Investment (FDI); the merger of MICEX and RTS exchanges and the creation of a central depository (market liquidity); Russia’s natural resource champions going global (Rosneft-Exxon, Total-Statoil-Gazprom, Total-Novatek); fastest growing consumer market in Europe and infrastructure investments for 2012 APEC Summit, 2014 Winter Olympics and 2018 Word Cup.