(Repeats Friday item)
* Investors bullish even after 50 pct stock, bond gains
* Many optimistic Trump will end sanctions on Russia
* Oil prices forecast higher in 2017
* If inflation falls, consumer demand spending should rise
By Sujata Rao and Andrey Ostroukh
LONDON/MOSCOW, Dec 30 It's been a tough couple
of years for Vladimir Miroshnikov, head of business development
at Rolf, one of Russia's biggest car dealerships. But like many
foreign investors, he's banking on an economic turnaround in
Russian car sales, once growing around 50 percent a year,
dropped off a cliff in 2015 after the rouble's 2014 collapse and
fell a further 10 percent in 2016.
Miroshnikov remains cautious, saying the next few months
will be tough and seeing the possibility of "a recovery only in
the second half of 2017". However, he told Reuters he expects
sales will at least stop falling over the year as a whole.
Foreign investors are more enthusiastic in hoping for a
revival in economic growth and consumer demand after two years
of recession. Even after roughly 50 percent gains on Russian
stocks and rouble bonds in 2016, analysts and fund managers
interviewed for this article remain almost unanimously bullish
on the country.
Russia figures among the top 2017 trades for Deutsche Bank,
Goldman Sachs, UBS, JPMorgan, Rabobank and Bank of America
Merrill Lynch among others, with Goldman predicting it "to move
from a recovery to a growth phase".
On the face of it, the stars do seem aligned for Russia.
Data showed manufacturing expanding in December at its
fastest pace since March 2011, a signal that the economy is
starting to grow again.
Prices for oil, its lifeblood, will average $57 a barrel,
according to analysts' forecasts in Reuters polls, $10 higher
than in 2016. And if the central bank brings inflation down to
its 4 percent target, ordinary Russians should have more money
Two other factors have added impetus to the trade.
First, Republican Donald Trump won U.S. elections on Nov. 8
with a promise to improve ties with Russia, holding out the
possibility of easing sanctions imposed after Moscow's 2014
annexation of Crimea from Ukraine.
And on Dec. 7, Glencore and Qatar teamed up to pay $11
billion for a stake in state oil firm Rosneft, confirming
Russia's allure for international investors.
Some are confident that the sanctions, tightened over
Russia's role in a separatist rebellion in eastern Ukraine, will
go after the new U.S. administration takes over.
"I like Russia for some very simple reasons: The most
obvious reason is Trump, because sanctions will be lifted," Luca
Paolini, chief strategist at Pictet Asset Management, said.
"But it is a little more complicated than that. It is one of
the few emerging markets where we feel it is cyclical...where we
think there is some decent potential in almost every scenario."
Hopes related to sanctions got a setback this week as
Washington imposed fresh curbs on Russian intelligence agencies
over the hacking of political groups during the U.S. election
But many reckon Trump will roll back the measures once he
takes office in January. President Vladimir Putin said on Friday
that Moscow would not expel anyone in retaliation, adding that
he would wait for the actions of Trump before deciding on any
further steps in relations with the United States.
Take the politics out, and Russia looks attractive relative
to many big emerging market (EM) economies. Unlike countries
such as Mexico or Turkey, it has a balance of payments surplus,
making it less vulnerable to the rise in global borrowing costs.
Russia is favoured by bond investors too because falling
inflation may bring 150-200 basis points in official interest
rate cuts next year. That will keep inflation-adjusted bond
yields at among the highest in the world.
"There is a lot more acceptance now that Russia is in a good
place," said Yerlan Syzdykov, head of emerging debt at Pioneer
Syzdykov holds more Russian bonds than their weight in
emerging market indexes, but Pioneer is also bullish on
Moscow-listed stocks, he said, adding that the fund was looking
to "put more money into cyclical recovery stories".
Corporate results have been encouraging. Earnings-per-share,
a key profitability indicator, recently surpassed their 10-year
average for the first time since 2012. bit.ly/2h1r1zG
In recent months analysts have revised up their estimates of
Russian companies' earnings at a faster pace than the rise in
oil prices, Thomson Reuters Datastream shows. bit.ly/2hTe3pw
But some are sceptical. VTB Capital analyst Maria Kolbina,
for instance, says Russians' real incomes will need to grow by
5-7 percent annually for a couple of years for consumer demand
to recover significantly.
Russia also scores poorly on all measures of corruption and
transparency; its fortunes remain tied to oil exports and a
recent report by the anti-monopoly service found state ownership
of the economy had doubled since 2005 to 70 percent.
But Pictet's Paolini says asset prices reflect these
concerns. Russia has historically traded at a discount to other
emerging markets and even after the 2016 gains, shares' ratio to
forward earnings is half the emerging markets average.
"Russia's PE is still very low, I would be worried if you
had a strong performance and very expensive valuations. But that
is not the case, Russia's PE is 6, Brazil is 14," Paolini said.
Many also see positive structural changes afoot.
"When people say nothing is changing, they think of
corruption and, true, there doesn't seem to be much change on
that front. But the move to inflation targeting and a floating
currency is a huge structural change," said David Hauner, head
of EEMEA cross-asset strategy and economics at Bank of America
Merrill Lynch (BAML).
Hauner advised clients last year to load up on rouble bonds,
a bet which paid off handsomely. He predicts at least 10 percent
returns next year, against zero from emerging debt overall.
BAML is also overweight Russian equities and Hauner said
hefty dividend payouts and falling inflation were not yet
reflected in share prices.
"The PE gap relative to EM has not improved at all, even
though Russia has fundamentally improved," he said. "The only
negative thing to say about Russia is that everyone likes it, so
if something goes wrong it could be quite painful."
(editing by David Stamp)