The Russian Federation First Mercantile Fund lost 10.9% in the 2nd Quarter of 2017

After significant performance in 2016 the Russian market experienced a correction in the first half of the year due to geopolitical instability, falling oil prices and a possibility of increasing sanctions burden. As a result the MSCI Russia index lost 15.4% comparable with oil price drop – 15.6%. The Russian Federation First Mercantile Fund showed the same result, at -15.1%.

Looking forward we believe that the second half of the year can be more positive for the Russian market.  In the first quarter of 2017 the Russian GDP grew by 0.5% after two consecutive years of contractions. The GDP dynamics for the second quarter and the first half of the year has not been released yet, but, according to Rosstat data in the period from January to May the country’s GDP grew by 1.3% compared to the same period of last year.  The Russian finances are in very good shape. The national debt is still much lower than most Western countries while the Russian international reserves increased to $412bn.  Furthermore, inflation continues to be on a decreasing trajectory. For the period from January to May it dropped to 4.4% from 7.4%.  Russian equities vs its peers (EM in general) sells at a 50% discount based on the latest P/E ratios; 7.4 vs 15.9 for the MSCI EM.

Russian stocks are well positioned for a rebound triggered by stability, moderate oil prices possibly poised for a rebound, the capital outflow slowing and, in the absence of strict sanctions, the resumption of inflow to high profitable Russian assets from foreign investors.