Weaker ruble and potential stimulus raise Russian stocks

As the trend of central banks around the world proposing massive stimulus to their economies continues, Russian stocks leaped to record highs as investors took advantage of a much weaker ruble, purchasing equities cheaper than any of their developing nation competitors.

As the ruble dipped 0.8 percent to 66.49 per dollar in Moscow’s late afternoon session, the Mices Index, dominated by the Russian currency, gained 0.3 percent as part of a six day advance and neared its record peak reached 3 months ago. The ruble has declined the third worst out of 25 basket peers, according to Bloomberg.

Weaker-than-projected U.S. data has encouraged many investors to back bets the Fed will leave interest rates unchanged, resulting in capital inflow to developing markets which promise higher returns. Therefore, cash has flowed in abundance towards Russian equities, and firms on the Micex are trading at 7 times their forecast 1 year earnings, compared to half that for the MSCI index.

“There’s a feeling to bet long on a lot of Russian risk at the moment,” said Michael Lane - Global Co-Head of the Investment Management Division at Shizuoka Capital Wealth Management who handle $10 billion worth of capital in the region.

“As long as regulators do what the market expects, those bets will yield heavy returns. It’s a very good time to be involved with developing markets, especially the Russian stock market. We are seeing a prolonged correction on crude and the ruble so there’s plenty of opportunity there for those wagering on a big oil recovery,” he said.

Many prominent analysts are recommending an overweight stance on Russian stocks. David Aserkoff, JPMorgan Chase & Co. Head of Asian Investments said Russia’s equities are “significantly undervalued” and offer “a lucrative return ratio and the best long term dividends out of any developing market globally.”

The ruble dip followed in step with the decline in crude, Russia’s biggest export business. In the U.S., drilling firms increased output putting crude stockpiles at a record high. The market reacted with a 1.8 percent drop in Brent shares to $2.79 per barrel.

The ruble’s decline, however, has been at a very slow rate, a testament to the Russian currency’s resilience, and due in part to the Bank of Russia’s decision to freeze interest rates in their meeting last Monday. Trader attraction to ruble-heavy securities is understandable, as they will always gravitate to currencies offering basement rates.