Through Karl Lester M. Yap, Netty Ismail and Srinivasan Sivabalan to 12/10/2021
(Bloomberg) – Soaring energy prices are prompting bullish bets on developing country exporters, with Russia becoming the preferred investment destination for traders.
The Russian ruble gained more than any other emerging market currency this month, bolstered by the prospect of rising oil revenues, as the country’s stocks outperformed as all developing stocks slumped . OPEC’s monthly report will be closely watched this week as investors seek new clues to the outlook for the oil industry.
This marks a sharp change of pace for emerging market investors who have spent the past few weeks worrying about the threat of cascading debt defaults from the Evergrande crisis in China and the looming prospect of a looming ‘a stricter Federal Reserve policy. This has soured demand for equities, bonds and currencies from emerging economies across the board – so far.
Investors have moved on to weigh the assets of Russia’s energy exporters to Colombia – whose peso is the second-best performer this month – to determine which offers the best bet.
“Energy prices will remain high and companies in commodity-exporting countries will benefit from the global tightness of supply of electricity-related commodities,” said Ali Akay, London-based investment director of the Carrhae Capital hedge fund. “This theme should continue to reassess energy and materials exporters.”
Turbulence in the energy market has highlighted Russia’s status as an oil and gas superpower and its sound finances. The world’s largest energy exporter has more than $ 600 billion in reserves, an enviable debt burden and low debt levels, and is pushing hard with rate hikes to contain inflation. The local currency value of Russia’s oil exports was around 6,000 rubles per barrel of Brent on Monday.
A review of earnings improvements for Russia relative to other emerging markets illustrates the divergence. Year-over-year earnings projections for Moscow-listed stocks have jumped 15% since the second half of the year. By comparison, corporate profit forecasts in Saudi Arabia rose 6.7%, changed little in Asia, and fell in Latin America. Emerging market energy companies are also around a third cheaper compared to the broader index despite recent gains, suggesting the rally has room to start.
Fund managers like London hedge fund Carrhae Capital responded by switching in part from Chinese tech stocks to Russian energy companies in the third quarter. Wells Fargo Asset Management has also moved its investments from China to Russia. JPMorgan Chase & Co. has strengthened its position on the Russian Depositary Index as it remains bullish on commodities and oil-related betting through year-end, wrote strategists led by Davide Silvestrini, based in London, in a report.
“Rising oil prices will lead to higher earnings and dividends from energy stocks which make up 59% of the index, and lead to a stronger ruble which in turn will drive domestic stocks an additional 25% of the index.” , they wrote. “As such, it is fundamentally perfectly suited as an equity vehicle for our bullish call on commodities, and oil in particular.”
In Asia, Indonesia is benefiting from soaring commodity prices, with foreign inventory inflows making their largest weekly count since May 2020 last week. The rupee is the best performing currency in Asia this month.
Here are the events and data to watch this week:
- Russian Energy Week Wednesday to Friday will present outlook for the country’s fuel and energy industry
- Russia’s trade data due Tuesday and the inflation report the next day will also be monitored
- Czech assets will be the center of attention after Prime Minister Andrej Babis suffered a surprise general election defeat, paving the way for protracted political wrangling over the formation of a new government that could eventually force the plagued billionaire to the scandal to leave power. The crown was one of the biggest losers in emerging markets last week
- In China, a plethora of data will provide clues to the health of the economy, which has been hit by a worsening energy crisis
- China’s overall social finance expansion likely accelerated in September compared to August as authorities stepped up credit support for the economy, Bloomberg Economics reports
- Export and import growth likely slowed in September compared to August
- Data due Thursday will likely show that consumer price inflation remained subdued in September, while the producer price index likely jumped on the rise in commodity prices.
- The Bank of Korea is expected to keep its key rate at 0.75% on Tuesday after raising it to a record high in August
- Chile is expected to raise its policy rate by 75 basis points on Wednesday to 2.25% after consumer prices rose more than expected in September in one of the fastest growing economies in the world.
- Peru will release economic activity figures for August that will give investors a sense of the pace of the country’s economic recovery as they assess the chaotic start of President Pedro Castillo’s government. The country will also release unemployment figures for September