VTB Capital Research team submit forecast for the Russian economy

8 December 2015
On December 8 VTB Capital’s Research team met with leading Russian and international journalists to discuss the prospects for the Russian economy. The discussion focused on the current situation and indicators for recovery in 2016, including the stock and bond markets, as well as discussion of the key events in the international financial markets, which will have the greatest impact on the Russian economy in 2016. The event was opened by Dmitry Dmitriev, Global Head of Research at VTB Capital.
Alexey Zabotkin, Head of Investment Strategy at VTB Capital: “From the global economy perspective, 2016 will be an extension of 2015. We see global GDP growing at a similar 3% rate, with the gap between EM and DM economies at historically tight 2-2½pp range (vs 5pp in 2003-12). I expect monetary policy to remain generally accommodative. This applies even to the US where we see the Fed’s course of action with respect to the policy rate hikes being a very cautious “one (or two) and done” scenario. Oil prices will remain depressed through mid-2016, with the second half of the year determined by the interaction of the impact from the capex cuts and the ratcheting up of Iranian supply. Our baseline scenario is the gradual recovery of Brent towards $60/bbl by end-2017.”
Alexander Isakov, Economist for Russia and CIS at VTB Capital: “We see three key macroeconomic issues featuring prominently next year. First, the fiscal policy debate and search for an acceptable consolidation package. Accumulated fiscal buffers allow for orderly adjustment and lend the government time to converge on a common vision of spending cuts and revenue generation. However, the ruble price of oil, which has stabilized below RUB3000bbl recently, catalyzes more active search for acceptable consolidation package.
Secondly, we expect capital outflows to decline, which is likely to have a positive impact on the exchange rate. Finally, we expect that credit impulse from the banking sector to local demand will remain limited. Growth in demand for borrowing will lead to healthier balance sheets of the banking sector.
Maxim Korovin, Senior Strategist - bonds, FX and rates at VTB Capital: “We think that the CBR would bring down the key rate to 8.5% next year. The market has already priced in that scenario, which is reflected in the negative spread between 10 and 2 year bonds at the moment. Unless international inflows continue at a healthy pace, banks would once again come to the center stage as the key players in the debt market. At current valuations, we don’t think that long end of the OFZ curve looks attractive to banks, given the large discount to the CBR’s cost of repo. We expect that OFZ curve would steepen driven by the front end mainly. Overall, we pencil in a total return of around 10% for near and mid-term bonds.”
Mikhail Rasstrigin, Equity strategist at VTB Capital: “Russian equities will continue fluctuating near the current 1700 level in terms of the MICEX Index, and in the medium-term, repeating the volatility of the past several years. In terms of the valuation, the market trades at the fair earnings multiple now. Although we expect the 15% p.a. average earnings growth for the market on the next two years, it might not be fully reflected in the Index growth. Leaving the commodities ‘trade’ apart, the key driver for equities would be development on the corporate governance side, namely fair earnings distribution among all shareholders. Those names with greater progress in corporate governance and also backed by strong earnings power as well as fair valuation will outperform the broader market index.”

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