Overweight stocks, underweight bonds
Gerardo Rodriguez is a Portfolio Manager for the Emerging Markets Group at BlackRock. He manages multi-asset portfolios across global geographies. As far as Russia (RSX) is concerned, he is bullish on stocks while being bearish on bonds.
In a recent conversation with Bloomberg, Rodriguez said that the improvement in the macroeconomic picture in Russia is one of the reasons that he’s overweight Russian stocks.
According to the Federal Statistics Service of Russia, the country’s economy is estimated to have contracted 0.2% in 2016. This may not seem appealing unless one sees that this was actually an improvement over the downwardly revised 2.8% contraction in 2015. According to President Vladimir Putin, the estimated contraction in 2016 was better than expected.
In a meeting with President Putin on February 15, Economic Development Minister Maxim Oreshkin is reported to have communicated that his ministry expects the economy to grow by “some two percent in 2017.” Its baseline estimate is 0.6% growth with crude oil prices at $40 a barrel and 1.1% at $48 a barrel.
Though other agencies are not that positive, they still expect the country to grow this year. The International Monetary Fund expects the economy to grow by 1.1%, while Organization of Petroleum Exporting Countries expects a 1% pace.
For Rodriguez, hopes of monetary easing and low valuations are other factors which make Russian stocks (ERUS) attractive.
Inflation in Russia is under control, with consumer prices easing to 5% in January 2017 – the lowest since June 2012. Though this is still above the target level of 4%, its downward path indicates that the target is not too far away. This provides quite a bit of elbow room to the Central Bank of Russia to ease monetary policy.
One of the things that it holding back rate cuts is the fact that the Finance Ministry, via the central bank, has started purchasing US dollars. This has put downward pressure on the Russian ruble and further rate cuts may accentuate this dampening effect. A weak ruble will boost government revenues from the export of crude oil, which can be used for increasing spending. However, a large devaluation would send a weak signal about the economy – something that the central bank does not want.
The US-Russia relationship is also a factor that BlackRock is watchful of while investing in Russia. For Rodriguez, the possible removal of economic sanctions by the US is an important aspect, but not the primary reason for the confidence on Russian stocks due to the lack of clarity on where the US stands on the issue.
He is keen on the consumer discretionary, telecom services, and materials sectors but is underweight on energy stocks as he thinks that the crude oil price recovery is nearly done for now.