Russia Equity Strategy:Thank Falling Political Risk

Oil Back at January Lows — After falling by 12% over the last month and 26%over the last 3 months, oil prices are now back below $50/bbl and at January lows!Equities Not as Bad — Russian stocks sit around 8% higher than where they didback in January when oil previously dipped below $50 (Figure 1).

    Pockets of Strength — Financials have proved particularly strong, now tradingalmost 20% higher than in January when oil was previously below $50.

    Thank Falling Political Risk — Our Russian Political Risk Measure is now 40%below the January levels from when oil was previously under $50 (Figure 2). Theresilience seen from both the overall equity market (and financials in particular) canbe linked to this marked fall in political risk.

    Still Tough for Stock-Pickers — The environment for Stock pickers in Russiaremains incredibly challenging, as evidenced by the extremely wide sector valuationdivergences and the very high pairwise stock correlation.

    Russia’s (Few) Quality Stocks — Although Russian is very underrepresented byquality stocks in a GEMS context, we do like the mix of earnings upgrades andrelative quality which MTS, Sistema and Tatneft offer (Figure 5).