It's about time to buy the pullback in Russian equities

Dubai - May 2017 means markets will shift focus from Kremlin's relations with Washington to Riyadh

When Donald Trump won the US election last November, my immediate strategy idea was to buy Russian equities and US money centre banks and sell the Mexican peso and long duration US Treasury bond leveraged ETF's. Russian equities went ballistic after Trump's win as Moscow's Micex index rose 26 per cent in the next three months. Friends in the City assured me that the new American president would repeal post Crimea sanctions in his quest to embrace Putin. Great powers do not care about far away little countries about which we know nothing, an argument Neville Chamberlain used to justify the death rattle of Czechoslovakia at Munich. A generation later, Brezhnev's decision to crush the Prague Spring with Red Army tanks did not prevent Nixon-Kissinger's policy of détente. International relations are based on hard power and national interest not the bombast of a real estate salesman, even one elected to the White House.
In mid-January, the Russian stock market indices peaked and fell 12-14 per cent, surrendering half their post-election gains. The links between Trump's campaign and the Russian embassy, FSB cyber-hacking the Democratic Party's computers, the brutal endgame of the battle of Aleppo and Trump's U-turn on an early end to sanctions soured investor sentiment on Russian equities. The selling frenzy in Moscow was amplified after the eight per cent plunge in crude oil since March.
The US Treasury has rejected Exxon Mobil's sanction waiver request for a new Black Sea drilling deal with Rosneft, the state-owned Kremlin colossus built on the carcass of Yukos. The foreign policy establishments in Washington, London and Berlin obviously do not want to lift sanctions on Russia until Putin makes concessions in Ukraine and Syria, which Putin will not do since financial market priorities do not dictate his geopolitical decisions. Even President Trump conceded that US-Russian relations are now near all-time lows. The American cruise missile strikes on a Syrian air base have derailed any prospect of an imminent Russian-American diplomatic rapprochement. The tragedy of Great power politics once again leads the world to the brink of catastrophe.
However, May 2017 means markets will shift focus from the Kremlin's relations with Washington to its relations with Saudi Arabia. There is no doubt in my mind that Russia cannot risk another oil price crash and will roll over the output cut pact originally brokered by Saudi Arabia last December.
The promotion of Prince Abdulaziz bin Salman to state minister for energy affairs and Prince Khalid bin Salman to be the kingdom's ambassador in Washington suggest Saudi Arabia will do its best to prop up oil prices now that West Texas crude has fallen back to $49. The Saudi decision to reverse pay cuts and benefits for the kingdom's public sector also necessitates higher oil prices. Saudi Arabia has also floated a $9 billion sukuk in the international capital markets to ease the credit crunch in the kingdom. Net-net, Opec output cuts will be extended in late-May. This makes Russian equities at 6.4 times earnings once again a value play.
Russia's energy/commodities exposure and geopolitical risk premium will mean it will always be the valuation Cinderella of emerging markets. However, despite Syria, Ukraine, sanctions and cyber-espionage, there are macroeconomic reasons why I would nibble at the Russian equities index fund now that it is down eight per cent from its highs. One, crude oil is at the lower end of a $50-$60 range. Two, Secretary Tillerson's trip to Moscow and the Trump White House decision to forewarn the US about the Tomahawk cruise missile strike in Syria suggests. Washington does not want to demonise and isolate Russia. Three, Russia has emerged from recession and could even deliver one per cent GDP growth in 2017. Four, despite the dramatic falls in inflation and interest rates, Russian government bonds still offer attractive risk adjusted yields. The central in Moscow just surprised financial markets with a 50-basis-point rate cut. Five, Jim Rogers has just gotten bullish Russia - and bearish India on relative valuation and earnings growth criteria. The co-founder of the Quantum Fund has a point here. Six, the plunge in implied volatility means it is rock and roll time in risk asset - and Russia defines risk assets. So I revert back to Wall Street folklore, an idea that served my readers so well in Pakistan, Argentina and even Russia in 2016: "the big money is made when things move from Godawful to just plain awful."
The writer is a global equities strategist and fund manager. He can be contacted at mateinkhalid09@gmail.com.