Russian recovery to drive earnings in 2H17

Russia’s equity benchmark, the RTSI$ (Russian Trading System Cash Index), fell 15.4% in ringgit terms over the first-half of the year (1H17), making it the worst performing market under our coverage for the period.

In local currency terms, the index was down 14.7% as the dip in oil prices since end- February led to the share prices of several companies to be adversely impacted and weigh on the index’s overall performance.

The weaker price of several soft commodities and industrial metals weighed on the performance of the consumer staples and materials sector which in turn hit the index’s performance.

The financials sector saw a decline in its valuations over 1H as geopolitical tensions continued to fuel negative sentiments and adversely impact the index’s performance.

As of July 20, expectations for earnings of Russian companies were to grow by 4.5% and 11.7% in 2017 and 2018 respectively.

As oil prices were comparatively stable and remained above US$50 (RM215) per barrel levels in January and February, earnings estimates of oil companies such of Rosneft Oil Co PJSC, Surgutneftegas OJSC and Lukoil PJSC were revised up in 1H17.

The earnings estimates of energy companies for the whole of 2017 were, however, revised downwards in the second-quarter (2Q) after oil prices began to fall in an increasingly volatile market.

For the whole of 1H17, the consumer staples and utilities saw the largest downward revisions in 2017 earnings estimates, while the financials and materials sectors saw an average upward revision in 2017 earnings estimates.

Recently released industrial production data showed the Russian economy stayed in growth territory in June, coming in at 3.5% year-on- year (YoY), moderated from a prior 5.6% YoY increase.

Real retail sales data improved in June, coming in at a 1.2% YoY, up from May’s 0.7% YoY increase.

Year-to-date, retail sales data have been on an uptrend, suggesting the domestic economy in Russia has gradually improved from last year.

This has been helped by disinflationary trends, with headline and core consumer price index continuously falling from 2016 and thus far.

In terms of leading indicators, Russia’s manufacturing Purchasing Managers’ Index (PMI) rose to a 50.3 reading in June, extending its expansionary trend and has improved since 1H16. The composite PMI came in at 54.8 in June, presenting an overall uptrend, and it’s thus likely the country’s economic growth would turn positive this year. Preliminary estimates of its 1Q gross domestic product, released in June, came in at 0.5% YoY, up from 0.3% YoY in 4Q16.

On June 16, the Bank of Russia slashed its key rate by 25 basis points to 9%, resulting in a total of 100 basis points cut in interest rates since the start of the year.

At this juncture, it is likely the central bank would continue to cut rates in the remaining quarters of this year, albeit gradually, and this should continue to support the recovering economy.

As of July 20, the Russian equity market trades at estimated price-earnings (PE) ratios of 6.6 times and 5.9 times for 2017 and 2018 respectively, representing a discount from its seven times fair PE ratio.

With oil prices expected to average higher in 2017 compared to 2016, it remains likely earnings of Russian oil companies would be supported over the coming quarters.

Additionally, the earnings of Russian companies in general would likely be able to benefit from the country’s improving economic fundamentals.

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