Russian equities in 2018: strong start should continue

At the start of 2018, Russia equities have performed relatively strongly and started to catch up with other emerging market (EM) equities after underperforming them by a considerable margin last year. We think there is still long way to go in hard currency terms, especially for well-constructed fund portfolios like Parvest Equity Russia and Parvest Equity Russia Opportunities.

Firstly, the rouble exchange rate vs. the US dollar is likely to stay rather flat given that there should be no pressure from the main fundamental factors: there is now little difference between the inflation rate in Russia and in the US, and oil price movements should be reasonably stable as the global oil market is likely to stay broadly in balance.

Secondly, the expected average 6%-7% dividend yield from stocks held in the funds should contribute to the funds’ performance.

Thirdly, the companies in the fund portfolios are likely to achieve, on average, a sustainable free cash flow growth of 8%-10% in 2018 compared to 2017, which would normally help to boost returns.

The fourth factor is that there is likely to be a positive impact from the 100bp-125bp key rate increase by the Central Bank of Russia (CBR).

And finally, stock prices could move closer to their fair values, with the overall upside to the fair values for the funds being in the range between 15% and 25%, in our estimation.