At the end of the month, the geopolitical situation has deteriorated sharply because of the incident in the Kerch Strait, which caused even short-term, but still panic on the Russian stock exchanges — investors feared the possible introduction of new sanctions. At the same time, the EU authorities and the UK somehow found a mutually acceptable solution on Brexit, and Brussels managed to push its position on the issue of budget deficit in Italy. Held in the US “black Friday” showed a new wave of growth of optimism of consumers.
As a consequence, in the last week of November, Russia and the West sharply reversed from the point of view of dynamics on the major exchanges. However, it soon became clear that this time the reckless actions of the West should not wait: almost all expressed a desire to wait for the full information from authentic sources and only then to make any meaningful statements on the incident in the Kerch Strait. As a result, the Russian stock market temporarily returned to the optimism at the end of the month Mosberg index gained 1.69 percent.
What will be important in December
Among the factors that can have a significant impact on the stock and currency markets of Russia in December, it is possible to highlight the background around the incident in the Kerch Strait. If confirmed balanced and pragmatic approach of Western politicians to this event — for the Russian investors, this may be a very positive signal.
Another important factor that will drive markets in the month of December, will be the dynamics of the energy market. Now the exchange is subject to speculation around the idea of an oversupply of oil on the world market, which aggressive players play on the slide. Uncertainty adds silence OPEC and trade disputes between the US and China, which cause the investment environment concerns about the growth prospects of the global GDP.
If the price of oil will continue to decline in the future, investors will have to reconsider their long-term and medium-term strategy based on new realities. However, even a moderate recovery of the cost of oil could make a positive contribution and stock markets, and the ruble exchange rate dynamics.
For investors operating in international markets, the second largest, after the trade wars is the monetary policy of the Federal reserve. From December 2015, the regulator six times to raise the interest rate. In the future, because of the risk of the slowing U.S. economy, the Fed will find it increasingly difficult to keep this pace.
So, according to the head of the Federal reserve Bank of St. Louis James Bullard, the growth rate of the U.S. economy will decline in 2019, up 2.5% compared to 3.1% in 2018. However, in the near future, the fed is unlikely to deviate from the intended path and already at the December meeting, apparently, will once again raise the interest rate, which could lead to further strengthening of the dollar against major world currencies.
The bond market
From the point of view of the price situation last month was rather unfavorable for the ruble debt market: OFZ curve again, as in the beginning of September, it was possible to record the yield of almost 9%.
The issue of monetary easing by the Bank of Russia, acting as a factor of support the market in 2015-2017, at least in the coming year withdrawn from the agenda. Interest of global investors for emerging market assets remains volatile, affected and correction of cost of oil to the year’s lows.
In addition, for investors still not clear situation with the resumption of foreign currency purchases in the domestic market in the framework of fiscal rules (as expected, some explanations will follow after the December meeting, the Central Bank). The importance of this issue due to the high level of correlation of the debt and currency markets.
Another factor that prevents debt market to regain its equilibrium, remains sanction — namely, the possibility of a ban on investment in new Russian debt. In General, investors are clearly not in a hurry to increase their positions in Russian bonds, not excluding that in some time to buy bonds will be cheaper. In these circumstances, a growing interest in tools that allow investors to hedge the risk of rising interest rates in the economy.
We believe that, while maintaining the threat of new sanctions, the increase in global uncertainty and further tightening of monetary policy in different regions of the world, completely eliminate of interest rate hikes by the Bank of Russia in the medium term is impossible.
In this connection, attention bonds “State transport leasing company” series 001Р-07, the coupon of which is recalculated on a quarterly basis according to the formula “the key Central Bank rate + 75 basis points”.
The Issuer of the bond is one of the largest leasing companies in the country and is in Federal ownership for this commitment are characterized as quasi-sovereign. January 13, 2023 at issue provides for a put option at face value: its holders are entitled to present their paper for redemption to the Issuer at a price of 100%. Now bonds you can fix the yield to maturity of 9.8%. Note that the coupon yield on the paper is completely released from payment of personal income tax.
Moderately became cheaper in November and the Eurobond market: the maximum dollar yield curve obligations of the Ministry of Finance (issue maturing in 2047) reached 6%. The increase in yields reflected the weak global risk appetite and the availability of the geopolitical premium in the price of Russian assets.
Turbulence in the markets leads to interesting from the point of view of profitability of ideas, among which include subordinated dollar-denominated Eurobonds of Gazprombank with maturity in 2023. Issue amount $750 million was placed in September 2013 with coupon 7,496% per annum.
28 December 2018 on the paper scheduled a call option at par (yield of this offer now stands at 34% per annum). If the Issuer does not exercise the right to redeem the paper coupon it will be recalculated according to the formula “6,024%+rate on 5-year Treasury obligations of the United States”.
If the revision of the coupon was held today, its value would be $ 8,914% per annum, which translates to a yield to maturity (in December 2023) level of 9.4%. In our opinion, this is a very attractive yield as in the background of the current situation on the market, and given the continuing global trend towards higher interest rates.
The stock market
In the Russian share market should pay attention to papers of oil and gas industry (“LUKOIL”, “Gazprom Neft”), the mining and metallurgical industries (CMI,“Norilsk Nickel”, “ALROSA”), producers of fertilizers (PhosAgro).
Favorable for these export-oriented companies, market conditions of the second and third quarters — the growth of world prices for the products with a simultaneous weakening of the ruble has created a good start for a high yield. Growing cash flow these issuers use to increase shareholder value through new investments, dividend policy or buyback of shares (buyback).
The claim of the state to get in the last time “excess profits” (in the terminology of the officials) exporters can successfully use to their advantage. Consent of mining companies to participate in financing projects in the framework of the “may” decree ultimately will result in infrastructure investments that benefit the industry, but still will be offset by additional benefits. A “freezing” of the oil market at a high price level can at least reduce the cost of oil may even be beneficial for industrial holdings.
In the financial industry you can pay attention to the shares of the Bank “Saint-Petersburg”. The credit institution reported net profit YTD 13% and also an improvement in the key balance sheet metrics loans and deposits. On multiples this is the cheapest Bank in the sector.
In late November the Bank may adopt a new dividend policy. We expect increase in the rate of payments from the current 20% of the profits for the company because the stock is “Saint-Petersburg” are trading with a low dividend yield, significantly behind on this measure of Sberbank and VTB. Progress on the rate of payments can lead to a positive reassessment of the Bank’s capitalization on the stock exchange.
In international market you can look at the stock Chevron — one of the largest oil companies in the world. Proved oil reserves from Chevron for the end of 2017 amounted to 11.1 billion barrels, the company produces over 2.6 million barrels of oil daily, she also is a world leader in the production of premium base oils of high purity. In the third quarter, Chevron’s revenue increased by 21.5%, to $43,987 billion ($36,205 billion a year earlier)
Chevron have a low debt ratio is 22.5%, whereas the average value for the industry — more than 30%. It tells about the financial sustainability of the Corporation. The advantage of the Chevron stock is a high dividend yield, which currently is 3.8%, while the S&P 500 index, the figure is only 1.8%.
After the recent correction in the stock market USA Chevron shares have become undervalued on most of the key multipliers in comparison with its competitors. Thus, the ratio P/E next 12 months, Chevron remains the potential for growth at 6%, and EV/EBITDA of 9%.
No less interesting and the shares of Verisk Analytics is one of the leading companies in the field of information and analytical services (big data). It has advanced technology of collecting and processing data on the basis of which creates analytical products that help users from different sectors — from insurance and Finance to energy to make decisions and manage risk.
Advantages of the company are the highest in the sector profitability and the ability to generate large cash flows. The pace of global economic recovery is expected to remain relatively high in coming years and this should support global demand for information and analytical services. According to our estimates, Verisk will be able in the medium term to show organic revenue growth at 7-8% per year. Our target price on the shares of this company on the horizon of 6 months is $135 per share, which implies a growth potential of almost 12%.
In the financial sector should pay attention to the shares of Prudential Financial Inc. — American company, providing through its affiliates and divisions of various insurance services and investment.
These securities appear undervalued compared to the insurance industry and the financial sector in General, with notable growth potential in the medium term. In favor of their purchase say several factors, including the long-term policy in the sphere of payment of dividends and repurchase of shares, a good quarterly earnings reports and optimistic forecasts, the current monetary policy of the fed. Taking into account fundamental factors and technical analysis, growth potential of securities of Prudential Financial for the next 12 months, according to our estimates, is about 21%.
In the segment of biotechnologies noteworthy shares of Horizon Pharma. It is based in the Dublin pharmaceutical company, which specializiruetsya on drugs from rare diseases. In the last quarter, the sale of Horizon Pharma in orphan and rheumatology segments increased by 12% and 51% (year-on-year) and rising trend is expected to be continued in the coming months. In addition, shares of Horizon Pharma seem significantly undervalued in relation to the biotech sector. On this basis, we recommend buying with a target of $25 per share, which implies upside of 21.7% from current levels.